I'm not sure why the bank would automatically issue a charge-back; that part seems strange to me. But the mandate that was issued essentially shifts the liability from the bank to the merchant.
"Starting October 1, 2015, that liability for fraud shifts from the bank to the store in cases where the bank has provided an EMV credit card but the store has not upgraded to an EMV terminal. The logic behind this is that the credit card issuer did everything in its power to protect the consumer, and the store ultimately dropped the ball, so to speak. This creates the incentive for both the bank and the store to upgrade to EMV — so the bank can avoid refunding fraudulent transactions and the store can avoid losing money on fraudulent transactions. If neither the credit card nor the store is EMV-ready, then the traditional liability rules apply." -NerdWallet
It seems very likely that the customer is committing fraud in the sense that they actually did have a meal in the restaurant, but from what I understand, your in-laws will still be liable since they didn't use the correct card reader.
I don't know what kind of payment system your in-laws have in place, but have the considered using Square? I use them for my business, and the customer service was excellent the one time I had to deal with a chargeback. They covered me regardless of what the bank's decision was because I provided sufficient proof that the customer actually made the purchase. Their reader for the chip cards is cheap too; it's $25.