The key legal point is a conflict between California law and the federal requirements for receiving federal funding which Free to Be accepts. California educational code section 51933 promotes abstinence but requires that "instruction and materials" also provide "medically accurate information on other methods of preventing pregnancy and sexually transmitted diseases", while the federal curriculum imposed on groups that take federal aid requires that abstinence education exclude other forms of preventing pregnancy and venereal disease.
The point of conflict between the ACLU and the administrators of individual schools is whether the law applies to a sex education program in whole or to each part of the program's instruction and materials. The school administrators say the presence of abstinence-only groups is one part of a larger sex education program that provides all the information the law requires. The ACLU says they have letters from State Superintendent Jack O'Connell and the California Department of Education finding in the alternative and declaring that abstinence-only groups are barred from teaching at public schools.
The ACLU also accuses Free to Be of not telling the truth about certain subjects in their presentation [PDF] where state law requires them to be honest. According to the ACLU, Free to Be's presentation includes statements about the psychological effects of premarital sex and abortion which are not justified in the scientific literature. In addition, it is amusing to see that Free to Be pretends there is a "secondary virginity" when one decides to stops having sex. Presumably there is also a third virginity after one starts having sex again but then breaks up with the significant other and goes through a long period of unsuccessful dating and not being able to get laid.
The most interesting part of the story is the ACLU's involvement. Their legal arguments might be sound, but by the group's past history one would expect the ACLU to be arguing against its current interpretation of the law as a restriction on the free speech rights of groups like Free to Be, since the freedom of speech includes the freedom to choose for oneself what one says and does not say. Why is the ACLU, of all public interest groups, involved in this on the side it is on?
It is a conflict of rights between free speech on campus and the right of the children to a quality education, but what authority gets to determine what is a quality education? There is the state law, but that has never stopped the ACLU from taking the side of unrestrained free speech when state or federal law conflicted with that ideal. That is what makes its involvement here strange and different.
Barely mentioned in the news is the religious angle. Free to Be was formerly associated with Catholic Charities and may have had an association with the the Catholic Church. Given that and the religious tint to most abstinence-only education, this incident might be a small skirmish in the wider war to insert or prevent religious dogma in state sponsored education. All involved seem to be quiet on that subject, however.
Related: Planned Parenthood has also complained about Free to Be [PDF link].