It doesn’t necessarily have to do with law (though often it does happen to map to that), but generally that’s the idea: what are the standard list of languages in use for naming, and what is actually in use in this given locale.
You offer some excellent examples of how tricky it can be!
In your example for the Ohlone name: if the preferred language set was krb;cst;css;en then it would Just Work™ out of the box. The Ohlone name would be selected if available (in whichever of the three dialects it appears in), with the English name appended where that is provided as well.
The “shared character set, different words” example seen in CJK languages that you bring up is another excellent case where language metadata is a requirement for the sensible/correct thing to occur reliably.
It is probably true we can’t fix 100% of cases, but right now OSM is failing in too many multi-lingual cases. Hopefully can improve that with some small changes.