I was getting some keys made and there was a sign at the hardware store that read “We will not make copies of keys that say DO NOT DUPLICATE”. I was just curious, is it illegal to make duplicates of such keys or is it simply a policy that is followed?
No, it’s not illegal. Unethical, perhaps, but not illegal.
Anecdotally, I had a DND key which the key guy duplicated for me, but only because the key was broken past the point where it could open the lock and contingent upon his keeping the broken original. For which I was grateful as I was using the key to illegally gain access to an office complex to crash during a bitterly cold winter while I was homeless.
Well, to a certain extent, that wasn’t a DUPLICATION, that was a replacement. 
You didn’t walk away with two copies of the key, you just walked away with a working one.
IWHAG that the locksmiths have something like a franchise or service agreement with the lock manufacturers. If they are found to be duplicating keys that they have agreed not to duplicate (such as Medeco), the manufacturer will cease to supply them with locks and key blanks. Not good for business.
Also, I think all locksmiths are bonded and that would be jeoprodized. Again, not good for business and trouble with the state.
According to Wikipedia (usual disclaimers about reliability of Wikipedia cites, etc.) it’s on the honor system.
I wanted a back up for my controled drug cabinet. The key is bolddly marked DO NOT DUPLICATE. I brought along all sorts of documentation to show that I was legit (business records). I was doing yard work prior to the trip so I was pretty dirty. The guy at the hardware store never blinked an eye, just made the copy.
But see, e.g.,
The same statute defines master key as:
a key planned and cut to
operate all locks in a series or group of locks, each lock having
its own key other than the master key for that individual lock
only, and each lock constructed as a part of the series or group
for operation with the master key. For the purpose of section
28-1316, submaster keys, grand master keys, great grand master
keys, emergency keys, and overriding keys are to be considered as
master keys
http://assist.neded.org/locksmit.html
But see, e.g.,
The same statute defines master key as:
a key planned and cut to
operate all locks in a series or group of locks, each lock having
its own key other than the master key for that individual lock
only, and each lock constructed as a part of the series or group
for operation with the master key. For the purpose of section
28-1316, submaster keys, grand master keys, great grand master
keys, emergency keys, and overriding keys are to be considered as
master keys
http://assist.neded.org/locksmit.html
Hmm… if only there was a ‘DO NOT DUPLICATE POST’ button on the straight dope. 
Indeed. I have already alerted the mods. I hope they will arrive soon to dispense summary justice.
There used to be a form you filled out to certify that you were authorized to duplicate the key. I did that once when I needed a copy. I called my landlord and he said it would be OK. The form just said I was authorzed to copy this key. I showed ID and gave the address where the key was used. If there had been something amiss, the key-osk would have had the info on file if someone thought to ask them. That was about 15 years ago, though. I’m sure that’s long since fallen by the wayside.
Originally Posted by The Associated Locksmiths of America Technical Standards Policy
7. Do Not Duplicate Keys: Orders for keys stamped “Do Not Duplicate” or similar wording will be handled in the same manner as any unrestricted key (see 8). ALOA members should inform the consumer that the use of keys stamped “Do Not Duplicate”, or similar wording, is not effective security, and further that the use of such words is deceptive because it provides a false sense of security. *Consumers who desire effective security should purchase a patented key control system rather than rely on a “Do Not Duplicate” marking. * italics mine
This is a very important point. It is very easy to obtain key blanks and key cutting equipment. Just recently, I saw a posting on craigslist for a key cutting machine, free to the first person to show up and ask for it. Failing that, a small file and some patience will do the job.
Companies like Schlage and Medeco produce key systems that can not be readily duplicated in the field - there are additional arrangements of bumps and grooves on the sides of the key. If you pay for the privilege, you can buy rights to an entire production run of a given design so nobody else will even be able to get blanks - you can have anything from “you own the design nationwide” on down to “only this specific locksmith has this design, but they use it for any of their customers that want keys that are difficult to duplicate.”
All you have to do is buy one of those plastic caps that fits over the top of keys. I do it all they time. They can’t read the “Do Not Duplicate” and I have never had them take the plastic cap off to make the key.
If they ever took the plastic cap off I’d just say it was given to me with the cap on and I didn’t know
Just as a matter of interest (possibly), I needed an additional key to the front security door of my apartment building. I’ve forgotten why I just didn’t ask the manager.
Anyway, I went to the nearest flea market and got one made for an extra 10.00. It clearly said ‘Do Not Duplicate’ as did the copy.
Bob
So you paid nine bucks for the “we’ll just ignore that” tax.
I used to work at an engraving shop that also copied keys. I always refused to copy any keys that said DO NOT DUPLICATE, just for the ethics of it.
However, I worked for a university at the same time, and the keys to my office were DND keys, too. One night, when business was very slow, I tried to find a blank to match my DND keys, and we just didn’t have them.
I’m sure that a locksmith would have the right blanks, but my point is that a lot of those keys would be hard to get copied just because the small places that don’t focus on cutting keys won’t want to keep the blanks in stock. (We could barely keep the regular house blanks in stock as it was!)