Wanted to poll AZ to see if anyone has any other theories and/or fixes. Pics below and some things I've tried out.
Here you can see that in the resting state, there are some coils touching. On further examination, you can see some wear in the blue coating where it looks like there is rubbing going on.

One thought I had was to lower the spring perch more. This would in theory spread out these coils and prevent them from touching as much. I did this slightly and am now within Bilstein's published specs in their manual (215mm from bottom of the shock), but it is still making these noises. Also, I am now lower than I really want to be. My target is just a hair over 26" fender-to-ground. I have heard of people running these coils at closer to factory height without issues, so being lower than 26" as I am now seems like it should work. I'd still like to raise them up more if possible. It's hard for me to believe that Bilstein's highest published spec is lower than 26" fender to ground (based on the manual). H&R OEs are ~26" FTG as a reference which are a 1.2" (30.5mm) drop. You'd think they would give you more wiggle room in height adjustability. And even their website says that this lowers the S4 10-30mm. So I think those published specs on the website are incorrect, unless I am doing something wrong.
Here are the images of measuring the correct height of the spring perch as far as I can tell. Keep in mind that 215mm = slightly lower than 26" fender to ground for me. I would like to fix this binding issue. So if you know what might be causing it or how to fix it, I would love to hear your ideas! This is not something I expected from a top of the line coilover. So I'm hoping it's just something stupid with the install or something easy to fix. I do plan on taking back to the shop for them to look at it, but I want to be prepared with suggestions for them to examine, or hopefully be able to fix myself. Many thanks to all who can help, you guys have been a great resource!


Manual diagram telling you about acceptable lowering adjustment heights.

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