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New York passed the law in the late 1990s following an uproar of criticism brought against them after The New York Times wrote a piece ripping the state for allowing an "Extreme Fighting Championship" event into a Brooklyn Armory in December 1997. The fallout of the piece saw top politicians come out against MMA for its more violent tendencies in order to prevent the event from taking place. In doing so, it also wiped out UFC, which had run PPVs in the Upstate part of the State while making early plans to come to NYC proper.
In short, New York State stood by the 1997 law, saying that at the time, it was a proper law that had been properly researched. The State noted that the sport has evolved since 1997 (spurred by Zuffa, which later bought UFC instituting a number of different rules implementations over time, although UFC had been evolving its entire lifespan), it was for the government to strike down the older law and replace it with one written properly for the current era.
Zuffa's lawsuit was based on the premise that the ban was illegally preventing fighters and fans their freedom to compete and enjoy what they want to enjoy.
The ban prevents New York from enjoying the taxes and side revenue that comes with promoting major UFC events, which instead go to cities like Boston and States like New Jersey.
The owners of Madison Square Garden have already come out in favor of overturning the ban and allowing MMA into the State, but thus far, attempts to maneuver it through the political channels have stalled. Thus, Zuffa went for the jugular with their complaints of restriction of freedom and expression.
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