Pepe has done an informal but (as he says) "real FREAKIN interesting" little study of supposedly inappropriate names via the Armory. Blizzard's naming policy, as you'll know if you've ever run afoul of it, is pretty stringent-- you're not allowed to create obscene names at all (obviously), names based on real-life or well-known sources (so no trademarks or references to celebrities or Blizzard employees-- Legolas is completely out), harassing words or phrases, or "partial or complete sentences."
Now, you can't really argue with most of that. The obscene stuff is a given, of course, though where Blizzard gets their criteria for obscene is anyone's guess-- one of my guildies had an undead warrior named "Skinflayer" that Blizz forced him to rename (he renamed it to Tenderheart, actually). And the copyright and famous names seems a little silly, but it's most likely just Blizzard covering their backside-- you never know what copyright holders will do when it comes to user-created content. But harassing phrases? No l33tsp33k? How can Blizzard possibly track this stuff?
The fact is, as Pepe points out very effectively, that they can't (except on Blizzard employees, strangely enough). Reported names, of course, will probably get a message that they must be changed, but there's no way that Blizzard actually examines the rolls name by name to figure out which are compliant with the ToS and which aren't. The problem, then, becomes who gets punished and who doesn't, and what whims that comes by. While I'm with Blizzard on the player bans, I'm not with them on this one-- either they need to stick to their naming policy or change it. As Pepe shows, just a few minutes of Armory browsing yields hundreds of "violations." I've included all of Pepe's links after the break-- be warned that some of the names are in fact obscene according to Blizzard's policy, and thus might be offensive to some of our readers.