I could easily see this type of thing happening. Already this kind of "scorched earth" policy can be seen on sites such as YouTube, where user accounts with many harmless, perfectly legal videos are obliterated if they put up more than two "infringing" videos. Plus, since the policy is "guilty until proven innocent", someone could make a false complaint about a video infriging and YouTube will take it down, no questions asked. It assumes the complaint is valid and does not investigate -too much trouble. If the complaint was false, you're the one who has to prove it. In other words, anytime you are suspected of infringement, you have to prove your innocence - they don't have to prove your guilt unless you appeal. That's not how American justice is supposed to work.
The Righthaven controversy of last year also speaks to this possibility... only instead of a targeted site being forced to pay a fine to a private entity and then continuing on, the site would be eradicated from search engines and essentially have access to it cut off unless it took circumventing actions. I take no comfort in the fact that this bill is addressed towards foreign sites. The precedent it sets would be easily applicable to domestic, non-commercial ones in the future. Plus, the language includes domestic sites in those it would obliterate from search engines if those sites "enable" the foreign sites in some way such as linking to them.
The dangers of blowing away site access due to the posting of links by third parties is especially true if the DMCA "Safe Harbor" legislation were to be gutted, as Henley wants it to be (DMCA "Safe Harbor" protects a site from being held liable for infringing uploads by its users - see Henley's thoughts on it here). However, the DMCA aspect is a separate issue so I'll refrain from going off on that tangent any further.
It's a thorny issue. While few condone illegal behavior and Henley's frustration is understandable, this attempt at a solution seems at best ineffective and at worst the first step down the slippery slope of internet censorship.
My reaction to the PROTECT IP act is similar to my reaction to the PATRIOT act. Both acts address real problems, both have good intentions, but overall both provide ineffective solutions that set dangerous precedents for government intrusiveness. Henley's language about those who object to the PROTECT IP act being aligned with criminals is also very reminiscent of the rhetoric used to push through the PATRIOT act. That kind of language seems designed to intimidate people into keeping silent if they object, and it leaves a bad taste in my mouth, frankly. I just trust that such was not Henley's intent and that, as a reasonable fair-minded man, he would welcome intelligent debate.
I respect Henley's intellect tremendously and I understand his desire to find solutions to industry problems, but I feel he is backing the wrong horse here.