Thank you to whomever moved this to Popular Media - I had originally intended this to go in the Water Cooler section (Back Fence), but was at work during lunch break, so I totally missed which tab I was in (I use Internet Explorer, was looking at multiple pages, long story). :D Sorry about the placement mixup.
Hi Spencerian! I'm going to break up my response to you into two different posts. This one is about the legal aspect of fan fiction.
Fan fiction is a tough thing for me as a hopeful fiction writer to understand.
I know it's fun to write stories based on characters created by another author. However, some fan fiction writers I know (I'm surrounded by many as I hang around a lot of science-fiction/fantasy lovers) don't "play it straight" with the characters.
As a result, the character's behavior can be severely distorted, which does no good to others who like to see the character behave as the author and owner of the character has portrayed them in official works.
I'll agree to that. My personal preference is for fan fic authors who respect the original creation and treat the characters with dignity, yet manage to put their own spin on the characters. That's what makes fan fiction fun, and also why I love Star Trek novels. Although following the formula of the characters, Star Trek novelists (and good fan ficcers) can put a different spin on the characters and make you fall in love with them.
It's also a legal problem. While we can always write what we want, publishing it (including for free on websites) for mass consumption (even for free) has earned the wrath of a few author's attorneys, either with simple "cease and desist" orders, or outright lawsuits.
As you said, the problem with fan fiction is that you, the reader, do not own the story or its characters. So there's an ethical issue when you use things that are not your own.
And as I noted before, since you don't own the story, your contribution, however witty or honest, may steer readers away from the original author's work--and that, then, becomes a form of stealing.
While I understand where you're coming from, I'll have to slightly disagree with you. Quite frankly, and I speak from my own experience as both a reader and a writer of fan fiction - fan fiction is bad. The odds of it taking away from an established author's livelihood is unlikely. It's unpublished stuff that's rough around the edges, has large plot holes, or has a lot of potential, but misses the mark by a mile. It's still fun to read, and some of my favorite stories are really pretty awful, but I wouldn't take any fan fiction over the original story in 99% of all cases, and in the 1% of cases where I would, the original story was usually pretty pathetic.
Moreover, most fan fic authors are already die-hard members of the fandom, meaning that they love the characters and the stories from the original source, and therefore are usually paying good money, out of love, to keep the original creation in circulation. Think of J.K. Rowling's "Harry Potter" series. Most fan ficcers there are fans who have picked up every novel, side book, trivia book, seen every movie, etc. The ficcers are, therefore, an active part of getting people into the fandom. Rowling and others have, in their way, free advertising, because people into the fandom will bring in their friends, and their friends will want to know what was going on in the original stories, and that leads to better sales. The same is true for most stuff produced by George Lucas - he sees fan fiction as a gateway to sales of his movies.
Finally, in a lot of cases, the only way to get to a fandom is through the fan fiction. Gundam Wing came out in Japan in 1995. I discovered it in 1998 and fell in love with the entire series, but it wasn't released in the US yet. I discovered it through fan fiction, which was great, and which made me curious about the original series. So I bought fan subs (fan-recorded and subtitled copies of the Japanese cartoons) and watched them, and then I purchased the VHS tapes the moment they were availble in the US - and then I bought the entire series on DVD. As did most of my friends in the Gundam Wing fandom.
Now, having said that, I do agree that a LOT of fan fic authors seem to think that they own the characters, the stories, even their own creations within the fan fics. Which is bogus. Any author of any integrity knows that she doesn't own her own fan fics - the original authors own them. That's why I do not write fan fiction based on novels of any stripe. The vast majority of my own fan fiction comes from Japanese anime that hasn't come to the US yet, or that has arrived but hadn't when I started. Series or works like Star Trek belong to the actors, the creators, the animators, the script writers, the editors, the directors, etc etc ad nausium.
Large corporations and groups that own a story and a series of characters are more inclined to want to encourage fan fiction and fandoms to thrive, because that increases their livelihood. Foreign corporations don't mind or encourage fan fiction because (particular in Asia) the feelings about copyright aren't as stringent as they are here in America, and because that's the best way to get people to demand that a new show or cartoon be brought to the US, where they will make more money. Singluar authors are less likely to encourage it. The best thing to do would be to find out the group or author's policy on fan fiction and abide by that.