Andy Baio (who took part in this year's Seven on Seven) writes about settling out of court for the pixel art cover to Kind of Bloop, his Kickstarter-funded "8-Bit Tribute to Miles Davis' Kind of Blue." As Baio explains, "the fact that I settled is not an admission of guilt. My lawyers and I firmly believe that the pixel art is 'fair use' and [Jay] Maisel and his counsel firmly disagree. I settled for one reason: this was the least expensive option available."
Baio goes on to explain how difficult it is to claim fair use in practice:
If you're borrowing inspiration from any copyrighted material, even if it seems clear to you that your use is transformational, you're in danger. If your use is commercial and/or potentially objectionable, seek permission (though there's no guarantee it'll be granted) or be prepared to defend yourself in court.
Anyone can file a lawsuit and the costs of defending yourself against a claim are high, regardless of how strong your case is. Combined with vague standards, the result is a chilling effect for every independent artist hoping to build upon or reference copyrighted works.
Also, as Marc Hedlund at O'Reilly Radar points out, "Andy negotiated the right to post the full story to his blog. That in itself is a huge accomplishment and service -- almost always, DMCA claims that end in settlement include a ban on speaking publicly about it. You should read the story, and when you do, consider that this happens all the time and we usually never hear about it."
Update: Mat Honan at Gizmodo has more, including this quote from Baio, "My lawyers and I firmly believed that I was legally in the right. But it doesn't matter, fair use doesn't protect you unless you're willing to pay to defend yourself. The average copyright case costs $310,000 to litigate when there's less than $1 million at risk."