I have no idea what the OP's personal situation is but not everyone can just quit their job because their boss is an idiot. Is this an ideal working environment? Obviously not. But just assuming someone can afford to quit their job is not helpful either. If the OP is aware of all the stupid things his boss does (which he says he is) then either he actually NEEDS this job and can't afford to leave it for whatever reason or he is choosing to be an idiot, too (no offense OP). It's not real easy to get a job these days.
To the OP:
First, if you have repeatedly suggested the owners have contracts, use boxes, quit making cakes with copy writed figures and they refuse to do so then it's time for you to let it go. I would just shut up and make the cakes and let them handle it. It's their business. Let them be responsible for it.
Second, I would tell the owners to either pay up or get a lawyer. Sure these people will look ridiculous picketing in front of the store but all it takes is for them to start showing the pics of the messed up cake and car around. The bad publicity isn't worth it.