I am not an attorney, but I assume the license is bound to the machine. If he creates the virtual disk, installs Linux on the same machine, and virtualizes the Windows on the new Linux installation (still on the same machine), there should be no problems.
If they moves machines, then yes, there is legal area to sue. However, Microsoft will not come after someone because they took a legal license and virtualized it. That's just not going to happen realistically. Knock on wood.
However, there may be a way to get an upgrade license to work as a fresh install. It may be worth your time investigating, and I may know, somehow, that it is possible.
Best of luck!