it's the same as cutting the label out of designer fashion clothing and sewing it onto something you designed.
While I would personally state that I think CleanFlicks should be able to do what they do, it is almost certainly in violation of the law as it is currently written, particularly since CleanFlicks is a public entity. You DO NOT have the right to purchase media and distribute it in any other form, format, or otherwise on any media other than the original without the permission of the copyright owner. This is all thanks to some amendments to the Copyright Act in the 1970s (plus some later lovely additions). The only right to additional sale or rental that CleanFlicks has is of the unmodified original media. Other companies and organizations that do their own minor modifications of various movies have contracts that allow them to make those changes to that media.
The only practical way to do what CleanFlicks does without violating the law is to use some type of metadata system which doesn't currently exist in any meaningful sense (i.e. send out additional data with the movie that a player can use to "sanitize" the movie on the fly). This may be possible in the future when some of the upcoming digital media container formats become ubiquitous, but for now they are pretty much hosed.