What would be the counter argument be to your reading of the rule?  Is there some other interpretation to "above" with respect to "proper course"?

L can sail below her proper course.
Only sailing above a proper course is restricted.
Why here would the windward boat think of complaining?

I agree with your interpritation. 
The problem is that, if the orange line in the diagram represents the best course, there being no other factors, then L should have gybed and headed for the mark at about 5.5. At position 6 she is sailing above her proper course (which is to sail to the mark) and a protest should result in her being penalised. That said there is a considerable difference between a diagram with nice lines on it and what you will hear in the protest room. Judging gybing angles is one of the more difficult things that Umpires have to do on the water.

I wonder if RRS 18.4 comes into play at about P6?  Is that not the more relevant RRS?

18.4 is i believe for rounding the mark not on the approack.
If nigel is correct, that is the relevant rule.

It could easily be argued by Blue that they were actually sailing their best course because bearing off and gybing onto dead downwind is disadvantageous, especially in a catamaran, so maintaining a higher course with better speed and then gybing with speed and maintaining momentum is the consideration for blue.  In fact if I were blue I would not have borne off at all, but held my course at position 3 until the lay line, then gybed for the mark.  Mind you, tactically, at position 6, the best course for blue is indeed to gybe for the mark.

18.4 only applies when 18 applies .. and they are outside the zone. No 18 .. no 18.4. 

Ok, so the issue is how to interpret "above" when a proper course is actually to be on the other gybe.

Side note ... the moment blue were to gybe, then they are on opposite tacks and 17 no longer applies. 

The same question could be posed going upwind and two overlapped port tack boats reach the starboard layline (Assume 17 applies).  At some point the proper course for L is to be on the other tack (starboard).  So, could the leeward port tack body sail up to "head to wind" because their proper course is to be on the other tack?

And I think the answer is that once you are at/past the point where your proper course is to gybe (you've reached the layline), then you must do so.  Upon gybing, rule 17 stops and other rules will switch. 

For going upwind, the leeward boat gets to luff to "head to wind" if they like and try to force windward to tack (once they reach the layline)

You are sailing above your proper course when the proper course is to gybe.

The issue I raised is: When is it your proper course to gybe?  My argument was that even in absence of another boat it may have been advantageous for blue to deliberately sail high of the layline in order to maintain speed and momentum through the gybe on the final approach to the mark.  This would define Blue's proper course, not what Yellow may have thought (which is clearly "gybe when you get to the layline")
Yellow, of course would say "no, he wanted to take me up so he could show me his transom with no overlap at the circle".  But if blue doesn't alter course at position 4 as I suggested earlier, the argument from Yellow would be weaker.

That said, with this particular diagram, I would want to make sure that Blue was deliberately sailing outside the circle.  It is not clear from this diagram that that is what Blue's intentions are.  If Blue were to sail another two boatlengths then it would be clear that he was above his proper course.  I would be hesitant to assign any penalty with this diagram.

I think  rule 17 directly defines what "above" means.

17 ON THE SAME TACK; PROPER COURSE

If a boat clear astern becomes overlapped within two of her hull lengths to leeward of a boat on the same tack, she shall not sail above her proper course while they remain on the same tack and overlapped within that distance, unless in doing so she promptly sails astern of the other boat.

By bearing away, she is not promptly sail astern of the other boat, so bearing away is not forbidden. Only rule 10 applies.

Establishment of tactical (and strategic) intention is part of the reason for sailing a particular heading and at the heart of the definition of Proper Course.  The definition: "A course a boat would choose in order to sail the course as quickly as possible in the absence of the other boats..." very much includes tactical (and strategic) intention.  The choice of course sailed is by the sailor, and granted by the RRS.

Before match racing did away with rule 17, there was a call that dealt with this, G8.  Essentially, once a boat needs to gybe to sail their proper course, that is what they must do or they are sailing above their proper course, even if that is DDW.

Note that W began bearing down on L at position 1. L's course was in defense.

I do not need to infer. I see the track. 

Probabily one of the best mental wanking I have see in recent past. Question is stupid and many of the answers are out of topic. The rule 17 only talks and limit the sailing above proper course, below is fine. Any below. Rule 18 doesn't applies as none of the boat is in the zone so rule 18.4 it's not existing. 
Any topics about "where to gybe" is out of matter becaus "in absence of other boats" is still referring to a boat that "is sailing above proper course" and not below. Same about "promptly passing astern".
In the situation posted there is no penalty for anyone.
In my life, on top of around 3000 protests I've been involved, I only had 4 or 5 protests involving rule 17. Welcome match race!