USM is not really prohibited from using the logo, but they may as well be...
Yep. They LOST and I mean lost. Not supposed to use it at all. However, apparently, Iowa has not followed through with the actual injunction to cease and desist them from using it.
Just to be clear, I am a patent and trademark attorney, so I kinda know what went down. USM tried to register their logo with the US Patent and Trademark Office (USPTO). Iowa opposed registration of the mark, on the grounds that it was confusingly similar to their own logo. The Trademark Opposition panel, in a 2-1 decision, ruled that the logo was too "confusingly similar" (a legal term that does not necessarily mean what you think that it means) to be registered by the USPTO, so registration was denied. USM could have appealed that decision in Federal Court, but I am pretty sure they chose not to.
A denial of registration, however, does not prevent USM from going ahead and using their logo un-registered. Businesses use unregistered trademarks all the time. Registration is really nice to have if you ever need to sue someone for infringing your trademark, but otherwise its really not that big a deal.
So, in order to force USM from using the logo, Iowa would still need to sue USM in federal court for trademark infringement. Iowa would probably win that suit. For a trademark infringement suit, you have to prove the defendant's logo is "confusingly similar" to the plaintiff's logo. Since Iowa already has a ruling from the USPTO that the marks are confusingly similar, USM would have a really hard time convincing a judge that the USPTO made a mistake, particularly since USM did not appeal the decision. So Iowa would most likely get an injunction if they ever needed one.
My guess is that USM reached some type of agreement with Iowa to phase out their logo and just end everything.