While I strongly disagree with that teacher's decision to tell 5 year-olds Santa is fake, I do think it's naive to say she should have not mentioned Santa at all.
It would be nice not to have to discuss Santa with my first graders, but the reality is that this time of year they ask me about it constantly. Not talking about Santa is really not an option when Santa visits our school for photos (a fundraiser) and to give presents of books to all the kids (a yearly gift from outside donors).
That said, I address the Santa issue the same way I talk about God when my students bring it up. I tell them that some people believe things that other people don't. I tell them that each person can choose what they believe and we should all respect others who believe something different.
When I'm asked really specific questions, such as, "Is Santa real?" or, "Is that the real Santa?" (both of which were asked last week), I just smile and give a vague answer like, "What do you think?" Then I change the topic quickly.