Well, I will say that I'd need to see all the details of the case before I could make a desician on how reasonable this is or not.
There is a common belief that a EULA, TOS agreement, or warning label absolves the maker of a product from all liability in regards to whatever is mentioned. A lot of things factor into it, ranging from whether a warning was visible when money changed hands, to the nature of the warning and the danger being mentioned.
A good example of this would be how when you buy a video game, some of them include pamphlets with a warning saying you should rest 30 minutes for every hour played or
something similar, this being there so if challenged a game company can claim "well your responsible for your own problem due to having ignored the warnings". Contract law is a touchy thing, and the feasibility of such demands, as well as their accessibility, and even how they are written can play into whether such a thing can actually be considered legally binding.
One old joke about video games is that if one was to take some of the more insane usage requirements and warnings seriously, these products would never have been approved for the marketplace. An entertainment product that requires 30 minutes rest for every hour played or something like that would probably be considered dangerous enough if the goverment ever felt that was accurate to require a user liscence, if it wouldn't just flat out be declared a controlled substance. Especially if you start getting into the addiction factor of video games which has been documented for many years now... and I'm sure anyone on this site has sat down to game and lost track of time. Heck, game reviewes present this kind of thing in a positive light when pimping games.
The point being that such arguements could be turned around on the person making them by a lawyer who was attacking from the right direction by asking if they ever made such a danger from usage they were apparently aware of to the goverment before putting this on the market, and things of a similar vein... but that's neither here nor there.
When it comes to Epilepsy, certain levels of light and so on are FAR more likely to cause it than others. As I understand the arguement, the light being put out here probably exceeds what a general "blanket" warning is going to cover. Sort of like how a blanket warning didn't exactly prevent a certain infamous episode of Pokemon being pulled, as it's simply unsafe to put out there even under a warning.
Really, a lot of this comes down to whether that version of Oblivion REALLY puts out that kind of effect. I sure as heck don't remember anything close to what hes saying.
I'll also say that despite many products including blanket warnings on the packaging, I checked both the STEAM store page, and the box of my physical copy of Oblivion (an old Collector's edition) and honestly I see absolutly nothing in the way of an epilepsy warning, although I haven't seen PS-3 packaging. Honestly if there is such a risk, I don't think it's going to take a biased judge to nail Bethesda here because I don't think there was any such warning that was clearly visible before money changed hands for the game.
... but then again, having played the game, I think the guy is full of it, because I honestly don't believe this game could have done that to begin with. I suspect he's groping for a law suit. If there was a problem with this game having a chance to bring on seizures like he's talking about, we probably would have heard about it before now. Things that are serious seizure risks typically wind up leaving behind a reasonably large trail of "carnage". I'm thinking of things like the infamous "killer Pokemon episode" here.