Sounds like a very unpleasant experience but thank you for sharing this information as it serves to warn others of this practice. I doubt this is the first time they have stung people.
What a cheek: having effectively not paid the agreed fee they surely have no right to the report and its contents. Yet they are prepared sell it on to others for a profit, even though they claim it is deficient. Very suspect and probably pre-meditated.
Maybe copyright/confidentiality clauses should start with “Subject to payment of the agreed fee,” as this would make clear that the report may not be used or relied upon unless and until payment is secured.
It is tempting to further contest their claim but, given the circumstances as explained, I suspect that this would be drawn out and ultimately difficult/costly to resolve.