On one hand, I think that the cake-makers are overreacting. It is a private business, and they can deny service to anyone, but seriously, it's just a CAKE. It's not like they're asking to have "Adolf Hitler" carved into a national monument.
On the other hand, I think that the parents should have been more... intelligent when naming their little son. They can't honestly say that they never saw this coming. Like kinseti said, it seems to me like they were just waiting for an opportunity like this. Wouldn't be surprised if on their wedding night they said, "Let's name our first son Adolf Hitler so we can stir up a bunch of controversy and win some big-ass discrimination lawsuit."
In the end, I think that the cake people need to just stop making a big deal. Adolf Hitler is in the past, and if we as humans can't just learn from our mistakes and move on, we're doomed to be a bunch of apathetic whiny losers.
Reminds me of some Pokemon "scandal" that I remember. Some Pokemon card had a backwards Swastika on the picture. The artist was getting a lot of flak for being anti-Semitic, but it turns out that it wasn't a backwards swastika at all, it was a symbol that represents good luck in Japanese culture.
If someone was anti-Semitic, I don't think that they'd display their hatred in a Pokemon card. Unless of course they were just a really really incompetent Nazi.