Smart,
Music 'legally downloaded from iTunes' are for individual personal consumption only. iTunes and other services like it are 'consumer based'. That meaning you purchase the permission to listen to it, not use it for anything else. Used to be you could use stuff like that under the 'fair use' guidelines long as you didn't try to repackage the work for sale.
Your client did not have the rights from Sony (the rights holder) to use said music in their video. If they do which I doubt, they need to produce the documentation asap. Those DVD's you made with that illegal music carry a penalty should Sony move on you with litigation for selling them without their consent. Each disc they prove you sold carries an individual penalty which according to copyright law will be held against you the distributor. Average penalties for each instance of infringement run upwards of $50k.
The 'Tube actually did you a favor by blocking your upload which brought this to your attention. Your best bet is to 'can' all the finished DVDs with the illegal music on them asap. If possible, you should recut the video to royalty-free music as to avoid this kind of costly amateur mistake. The good thing is you caught this in time and asked questions here.
Yes, when you purchase photos, music, graphics and so on from services like fotosearch or whatever, make sure you read the fine print on what you can and cannot do with the materials. The main things to look for are 'royalty-free', 'without restrictions' and 'without time limits'. The legit services and vendors will have most or all of those phrases in their 'eula's'. If you don't see any of those phrases, move on to a service that does.
