The question of whether or not fan fiction could be considered fair use has never been addressed by the courts, but some legal scholars have suggested that it should be a categorical exception. While the public generally believes that a distinction exists between commercial and noncommercial use with regard to copyright, this perception has never been accepted as law.
Because “[t]he standards for invoking the fair use doctrine are so vague,” fear of litigation may chill the creation of fan fiction altogether. Fan fiction came under the scrutiny of copyright holders as early as 1977. More recently, Warner Brothers made headlines by sending cease-and-desist letters to teenagers running Harry Potter Web sites. However, no fan fiction case has ever gone to court, either because copyright holders have decided to ignore them or because of fan authors’ inabilities to contest cease-and-desist demands. In fact, most fan fiction writers would prefer to keep it that way.
[QUOTE] From From Casey Fiesler, Everything I Need To Know I Learned from Fandom: How Existing Social Norms Can Help Shape the Next Generation of User-Generated Content, p738-739