I’m bumping this because I think there’s more to the debate.
Is fanfic legal? If it wasn’t there wouldn’t be a fanfiction.net, or a Gossamer Project or any of the other sites that are up. There are copyright laws but there are also fair use protections. In the fan fic community generally a disclaimer is thought to be enough, but maybe it’s just tolerated.
Fanfiction.net made the decision several years ago to stop hosting RealPeople fic, a subset of fanfic that’s based on, say, the Who. They had no end of protests from Monkees fans who SWORE that their fics were based on the show. I’m not certain if this decision was a legal issue or a squick factor one.
However, I’ve personally read at least five novels about the life of Lord Byron, including one that rendered him as a vampire. The creation of Frankenstein may well be the most fictionalized incident in all of Western literature. Some are serious; others are silly. It’s hard to read the 19 year old writer of Frankenstein as Mary Sue Shelley. Is it different because the protagonists are dead? Byron himself based a lot of his poetry on legends he’d heard. Is that fan fiction? At least one of his works was staged without his permission in those days before solid international copyright protections. Was that fair use?
There are some writers who actively encourage fanfic of their work. Chris Carter named a minor character in the last two seasons of the X-Files in honor of a popular fanfic writer who died of cancer, Leyla Harrison. On the other hand, George Lucas tried to force writers from the Star Wars ficdom to post their work exclusively to his website and then claimed that their work was his property. Lucas, of course, is currently working with Speilberg again on another Indiana Jones project. In the mid-70’s Speilberg was listed as Executive Producer on “I Wanna Hold Your Hand,” a movie about a group of teenagers who plot to meet the Beatles during their first trip to the US. Is that a fan fiction?