Fanworks-relevant copyright case: Kelly v. Arriba Soft
I've been thinking about the case of Kelly v Arriba Soft. Short synposis: Arriba Soft Corporation, later ditto.com, had an image search engine with thumbnails. Leslie Kelly insisted that their use of his images constituted copyright infringement--these are entire images, resized to thumbnails, offered without permission, for commercial purposes. The courts disagreed; they ruled that thumbnail images are fair use. (There was also an issue of inline linking, "click the thumbnail to see the full image." That part was less resolved--but less relevant to fandom; we don't have a "click on fanfic to open the original book or movie" option.)
The ruling mentions: "Although Arriba made exact replications of Kelly’s images, the thumbnails were much smaller, lower-resolution images that served an entirely different function than Kelly’s original images." I think of fanfic as working with the textual equivalent of "thumnails" of the original: short snippets that let you identify characters, places, timelines--but with a different purpose from the original. And while, unlike search engines, it's hard to claim that fanfic has a great public benefit, it is easy to claim that it's a creative art--and unlike search engines, it's noncommercial. This may balance out the original first-factor aspect of the ruling.
Purpose & Character of use: Transformative: "This first factor weighs in favor of Arriba's due to the public benefit of the search engine and the minimal loss of integrity to Kelly’s images".
Nature of copyrighted work: "This factor weighs only slightly in favor of Kelly". (They're definitely his creative work being used by other people. However, they're already online, the nature of which involves some kinds of copying and data transfer.)
Amount and substantiality of portion used: "Copying an entire work militates against a finding of fair use ... If the secondary user only copies as much as is necessary for his or her intended use, then this factor will not weigh against him or her ... This factor neither weighs for nor against either party ... It was necessary for Arriba to copy the entire image to allow users to recognize the image and decide whether to pursue more information."
Effect of the use upon the potential market for or value of the copyrighted work: "Arriba’s use of Kelly’s images in its thumbnails does not harm the market for Kelly’s images or the value of his images".
Final analysis: "Having considered the four fair use factors and found that two weigh in favor of Arriba, one is neutral, and one weighs slightly in favor of Kelly, we conclude that Arriba’s use of Kelly’s images as thumbnails in its search engine is a fair use."
I am not a lawyer. I am not a law student or paralegal. This is not legal advice. Rather, this is a way to think about the "copying" involved in fanfic and other fanworks: the use of elements created by someone else, edited and arranged for different purposes and a different audience. A work which aguably enhances the market value of the original (and I only say "arguably" because I don't know of any hard statistics, although we seem to all be aware that more fans=more money for original and more fanstuff=more fans).
This, much more than the Acuff-Rose case, may be the legal ruling most relevant to fanworks creators.