tip: arthur merlin words>1000 sort:hits
It's probably way too early to say anything about how it'd really be implemented, but I expect it wouldn't be Ao3 doing the identification of supposedly infringing works, but that it'd be done by some external service (like the ones that check for copyrighted music on, say, YouTube and Tumblr). It's all pretty complicated, so even identifying/defining what's fair use and what's not would be a big obstacle to anyone trying to censor content, text-based stuff in particular. You only have to look at places like Etsy and Zazzle to see how people circumvent copyright all the time and how difficult it is for the copyright holders to control fan-made products. Everything's very much hypothetical at the moment, really.
That's so true. My personal favorite is how the Transformers fandom, to get around copyrights on the Autobot and Decepticon insignias draw hearts in place of them on characters. It is such a happy solution