My guess would be that the disclaimer is an attempt to evade product liability/personal injury claims. A personal injury claim from a faulty product injuring a person's genitalia could easily stretch into the millions of dollars.

Also, calling it novelty and not for internal use should help it to avoid the FDA definition of a medical device:

Per Section 201(h)(1) of the Food, Drug, and Cosmetic Act, a device is: An instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is:

(A) recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them,

(B) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or

(C) intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes. The term "device" does not include software functions excluded pursuant to section 520(o).

My guess would be that the "not for internal use" disclaimer is an attempt to evade product liability/personal injury claims. A personal injury claim from a faulty product injuring a person's genitalia could easily stretch into the millions of dollars. As a comment noted, I'm not aware of this being tested in court, and don't have time to fully research, but it doesn't hurt the vendor to try.

Also, calling it novelty should help it to avoid the FDA definition of a medical device:

Per Section 201(h)(1) of the Food, Drug, and Cosmetic Act, a device is: An instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is:

(A) recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them,

(B) intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or

(C) intended to affect the structure or any function of the body of man or other animals, and which does not achieve its primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of its primary intended purposes. The term "device" does not include software functions excluded pursuant to section 520(o).