What to do if reviewers reject a paper without understanding the content?
F'x has ably covered one possible reason: that it's not you, it's them.
I'm going to cover the other side of things. That is, starting from the assumption that the editor has made a good decision.
The authors should consider rewriting the abstract and introduction. If two peer reviewers didn't understand the paper, the paper may just need a savage reworking.
The authors may also wish to try working with a freelance development editor.
Finally, the authors might want to bring on board a co-author who's been frequently published: I expect that many decent-sized, decent-quality departments have at least one person whose quality of writing leads to get manuscripts getting accepted first time, pretty much every time.
And then submit to a different journal. I don't know the field, but I'm willing to speculate that there are a few reputable journals where the article could be published.
There is an extremely simple rule for dealing with reviews that make you unhappy. Here is the rule: it's not them, it's you. This rule of thumb implies, it is never the reviewers' fault. Rather, it is always your responsibility.
Oh, you say the reviewers didn't seem to understand the paper? Well, that's your fault. It is your responsibility to make sure the paper is comprehensible to its intended audience. If the reviewers didn't understand the paper, odds are that the rest of the readers of that journal/conference won't either. Maybe you need to do a drastic rewrite to make the paper more understandable. Or, maybe you submitted the paper to the wrong place.
The reviewers didn't seem too excited about the paper, and they gave you a short one-line review, or they focused on nitpicky comments about grammar and didn't say much else? Well, that's on you. It's your responsibility to convince readers that your results are significant. Maybe your paper's results just aren't up to the level of significance expected at that journal/conference, and you should be submitted somewhere else. Or maybe the paper didn't adequately make the case for why people should care about your results.
Why this rule? Because authors are notoriously poor at seeing the shortcomings in their own work. No parent thinks their own baby is ugly. When you get negative reviews, it is natural and human to assume the reviewers are idiots and too blind to see the brilliance of the work sitting before them. Well, that's fine. Take a moment to curse the reviewers, and get it out of your system. Then calm down, and think more rationally. It is rare to find cases where reviewers are stupid or lax in their duties; it is much more common to find that there is something valid behind their reviews.
Realistically, if the reviews are negative, the most constructive thing you can do is improve the paper and re-submit (possibly to somewhere more suitable). There is almost always some way that you can improve the paper and that you can learn from the reviews you got back.
I realize my rule might seem like an oversimplification. Well, technically, I suppose it is, but it's a lot more accurate than most folks who are new to the field realize.
In my experience, complaining to the editor rarely leads to any positive result. I suppose that in the most extreme of cases, it could be warranted, but I would have a heavy presumption against that. And, you probably don't have enough experience to form a judgement on that. Before complaining to an editor or appealing the decision, sit down with someone much more senior and more experienced and ask for their advice. If they are skeptical or neutral, don't bother complaining; just improve the paper and submit it elsewhere. Only if they tell you that complaining is the right thing to do should you consider complaining to the editor.
The first course of action is to reply to the editor who made the decision. Write to them, say that you are willing to improve the manuscript for publication given some guidance from the referees, but the judgement by referee #2 seems a bit rash and not thoroughly justified. Possibly, send to them a revised version of the manuscript, taking into account comments made so far, and ask them to reconsider their decision. You can also hint that you would like them to send the (revised) manuscript to yet another reviewer (some editors have the concept of an “adjudicating” reviewer, even though the editor should actually ne the adjudicator).
The second avenue to try, if the first one does not succeed, is to ask the matter to be escalated to the associate editor (or senior editor, or arbitration committee…). The exact procedure will be indicated in the journal’s instruction to authors, but usually one way is simply to ask the corresponding editor to forward it. For example, at the end of your email from step #1 asking for him to reconsider his decision, you could say:
We strongly believe that you might find our revisions and this justification sufficient to consider our paper for publication in XXXX. If that is not the case, we would like this matter to be escalated to an Associate Editor.
Be aware that it's somewhat of a strong option, because people usually don't change their mind very easily, and they don't like to prove their colleagues wrong. So, one option you really have to consider is simply publishing your paper in another journal. At least, sketch something like a risk/benefit analysis before appealing the editor’s decision.