I was always under the impression it was the actual cutting edge. I knew about the general measurement with the palm of one's hand, but that will definitely change depending the size of one's mitts. I measured mine just to check. Cutting edge is 3 1/4", and the entire length of the blade from tip to handle is 3 1/2" so I'm set with mine. Thanks for the clarification.
I have a friend who carries a couple CRKT M16-SF14 which is bigger than mine, and ended up doing an evening in de-tox, and was given his knives back. The actual cutting edge on his knives is 3 1/2" so I guess that's what the LEOs went with in his case. I think like OneGuy said, it depends on what the circumstances are. If the knives were being used in an illegal manner, then you're running into other problems.