This whole thing screams unconstitutional.
The implication is that all clergy need lawyers on standby for confessions: an expensive third party who parses details of a sacred confession to see if it meets legal standards. This becomes an entanglement of government into core religious beliefs and puts a negative burden on religions. The same thing was brought up in the James Huntsman case, that clergy should not have to run their sermons past lawyers and accountants to ensure it meets government legal clarity and muster.
They were in a religious setting. He was confessing. Because he turned his head directed his confession to his wife shouldn't make the bishop liable for damages.
If this stands then priest-penitent privilege is not allowed in the LDS church but is allowed for other faiths with different confession styles. We often require councils with a few more leaders and a clerk to record the meeting. We believe confession belongs in many situations to multiple people, not one. The US government here is defining who is clergy, which gives some religions government sponsored rights while others do not get those rights. That's grossly unconstitutional.
This again reminds me of the James Huntsman case. Initially on an appeal two judges redefined what tithing meant for the church, and tried to use church texts to make their case. The later appeal ruled against that unanimously and viciously shot down that idea. Religions enjoy broad latitude to make these definition calls for themselves. Government can't redefine a religion's own words for them.
This Arizona lawsuit has been appealed to their Supreme Court, and I do not expect this ruling to survive as is. It's got major First Amendment issues.