I'm going to disagree with oldenglish. Sort of. For non contest lineups
I would say the first guy up has or should be given the right to continue surfing. He was clearly already on his feet and had caught the wave and hadn't gone for it when there was someone inside him also trying to catch the wave (to the extent there was an inside). Maybe the other guy could technically claim priority but - contests aside - its only going to create issues in the line up if you try and claim it.
In the end the overarching rule - as I interpret it - is 's/he who is in a position to catch the wave first gets priority'. Normally that is the person closer to the peak, because that is where the wave is breaking the earliest, hence where you can start surfing the earliest, and this is the default rule.
But you can't expect - in my view - start paddling after someone has actually already caught the wave and then claim priority. Again, maybe technically you can, but trying to enforce the technicalities of the law over the common sense approach is just asking for trouble. In waikikichan's example, as he said, if the red guy inside had started paddling early enough then waikikichan would have had to pull out. But (ignoring contest rules) if red hadn't made serious efforts to start paddling, once waikikichan was standing the other guys should just suck it up and let him have the wave. If the other guy was sitting 20m further in because he was on a shortboard and was never going to start paddling before waikikichan got to his feet, then tough. SUPs steal our waves, we steal shortboarders waves. The solution is to let waves go through, not to argue over peak vs first to feet or take off under someone's feet.
Here is a good explanation of the rules where I surf... it might be different in your part of the world, but I like the approach being taken. I'll accept that these rules are local variants on the 'universal' rules and that they are designed to avoid conflict, not to have a strict set of technical rules that are enforced no matter what. Note that sitting inside and deeper and trying to claim priority over someone already on the wave is seen as a form of snaking - at least for these guys. Where its not clear, first to start paddling should be given the wave. Then again, we don't have particularly crowded breaks most of the time - more than 6 or 7 and it must be a public holiday weekend. So we can afford to be
most polite to each other.
http://mollymooklongboarders.com/wp-con ... quette.pdf