Before we start, I just saw the news and the relegation was because he chopped down on Kelly (yeah, his own teammate!) in the back straight on the last lap and actually hit his front wheel. Kelly is, to put it mildly, a tad peeved as he would have medalled for sure.
Anyway, back to the sprinters lane thingy. Once the sprint starts the lead rider will usually occupy the sprinters lane because it's the shortest distance around the track. The sprint start is as ajudged by the commissaires, could be any time in the race. Clear as mud? Cool. Once the sprint starts riders trying to come around the outside of anyone who is already in the sprint lane are not allowed to interfere with the riders in the sprint lane, and that, means you have to stay outside the line. Technically I think the rule states a gap of at least 2 bike lengths before you can drop into the sprinters lane after passing, but in most races I've seen the big C's let you get away with as little as 1/2 bike length.