I agree it was a poor decision in retrospect, I cannot be sure it was idiotic.
If fraud was involved, it is not always easy to detect. After all, criminals are clever and they deliberately hide their tracks. I agree with Jed that there is no evidence that IH were idiotic. It might be they accepted initial test(s) beacause they were unable to prove fraud at that time. After all, we like to presume innocence and give anyone the benefit of the doubt. But probably suspicions were raised and as Dewey says, IH discovered the flow meter was tampered with. Isn't it strange this is similar to the accusation that Gamberale made of DGT. And others (confidential insider information here) made a similar accusation of Rossi years ago.
The real problem is that the scientific community, desperate for confirmation that LENR was real, did not speak out against inadequate verification. Rossi bought the support of Focardi (who was dying of cancer and needed cash for medical expenses). I recall Collis, at the ISCMNS AGM at ICCF16 (2011) in illustrated Rossi's reckless disregard for truth but he was shamefully criticized for his alleged naivety. For most people Rossi offered hope. They were willing to forgive outright lies so long as LENR prosperred. (Read they hoped for fresh research funds). Even the NASA guys told me, after Rossi's failed demonstration to them in Bologna, "... you must admit that Rossi has brought attention to the field". People seem to think that greed justifies dishonesty - so long as it is within the letter of the law. Well, the letter of the law will now be tested in Court. The Court wil not examine every scientific aspect, but hopefully enough at least to determine where some of the truth lies.
It looks like a major hope for CMNS is continued investment by IH. Rossi, by his legal action is risking the destruction of that (and all) funding and indeed the destruction of the reputation that honest researchers still enjoy. I would strongly advise all Rossi supporeters to persuade their hero to submit his technology to completely independent validation. And please do not tell me that there Rossi's IP must be kept secret. It is an obligation I think, under US patent law, to propose the best possible implementation of any invention. So if Rossi has invented anything (something I seriously doubt) he is obliged to publish it in his patents. Consequently objections that IH somehow divulged Rossi's secrets lack any substance.