1. If Commodore could simply design and sell a piece of hardware that connects to the phone line, why couldn't the modem connect directly to the phone line?

2. Wouldn't the adapter be illegal under the same regulation? The phone remains physically connected to the network (there is a cable running to it), yet when the switch is flipped that phone is no longer functional!

3. Why did Commodore even need to ship a phone, rather than just the adapter?

Squinting a bit I can see that perhaps there was some contracts behind these scenes between these two companies that let Commodore bend the rules as long as they were paying the bribe of buying a new phone, but it isn't explained at all.