Apple's argument basically seems to boil down to this: smoking near your device more or less equates to throwing it in the aquarium, or driving your car over it. In both of these cases, your warranty is void because it is your own fault. These are obviously perfectly legitimate stipulations.
The problem with the smoking claim is that the smoking itself did not break the devices in question. Apple is in fact arguing that the accumulation of smoking residue inside the computers in question means Apple employees can't fix them, because it would be a violation of health regulations.
You can argue about whether or not smoke residue in a computer can be deemed a health hazard, but even if it is - is it fair to pass this cost on to the consumer (one of them didn't even smoke - one of her room mates did!)? There is no mention whatsoever about smoking in the AppleCare terms, so how can Apple - or any other company for that matter - deny repairs? The fact that it is a health hazard is no argument to pass this cost on to the consumer, as Apple is legally and contractually obliged to fulfil AppleCare or warranty terms. If it is indeed a health hazard, then Apple will have to replace the device or wear a hazmat suit or something during repairs.
In other words, health regulations are the manufacturer's problem, not the consumer's.
The only way in which a company could deny repairs for smokers is if the smoke actually is the cause of the malfunction, and that this is classified as an external influence not covered by warranty/AppleCare, but it is quite clear in these cases that's not what happened.
On a related note, this is of course yet another sign of the ridiculousness of the anti-smoking lobby. All around us the world is going to hell, but we're too lazy and cheap to do something about that, and those problems are usually too grand for the population to grasp. Luckily, everybody does understand the hazards of smoking, and as such, politicians can score easy points by enacting ridiculous anti-smoking measures.
Disclaimer: I don't smoke. Never even tried.