DISCLAIMER: I am not a lawyer, so do not take everything said here to be without fault. Please seek legal consult before making business decisions.
So once again, Nintendo shuts down more than 500 indie/fan games that were using their IPs:
This is of course perfectly within their legal right, and really based on trademark laws is actually required of them to maintain the mark, but a lot of fans and indie developers themselves seem to always cry foul when this happens. Many are often claiming that the work is "Fair-Use" or that because they've released it for free that it should be perfectly legal.
The nitty gritty
There's a lot of disinformation there unfortunately. But before we dive into that mess let's look at one of the biggest issues in this Game Jolt situation. Free VS Profit.
Besides all being based on Nintendo IP, these 500+ games that were taken down had another thing in common, they were "free-to-play". So then there's no profit being had right? Well as it turns out, while it may have been that the developers of these titles may not have found a profit, the games on Game Jolt are Ad supported, as noted in the official DMCA notice.
These web pages display images of Nintendo's video game characters in connection with unauthorized online games that copy the characters, music, and other features of Nintendo's video games. The web site at gamejolt.com generates revenue from advertising banners displayed on the site and advertisements played while users wait for the games to load.
So Game Jolt was earning a, potentially decent profit, not intentionally off of Nintendo IP but since the revenue is enable site-wide, it definitely could be argued that the traffic brought in by Nintendo IP was a factor. It's also worth noting that Game Jolt offers up to (I think) 30% (number may be off) of Ad revenue on a game to the developer should they choose to have it. And while it's possible many developers were not accepting said revenue, it's equally likely that many were.
The other big thing of note is Nintendo is about to have their new console out, and since first party IP is really all they have to their name right now they're probably performing a brand cleansing to (hopefully) focus attention on their upcoming releases. I mean sure Nintendo have always been tight on their IP, but this was a large scale and sudden take-down.
Since many of these games were not only using the actual branding of these Nintendo properties, but in many cases assets ripped directly from the original games, it becomes hard to defend them on any legal grounds. But what about fan games in general? Is there no way aspiring developers can use their talents to share their love of their favorite franchise and still stay legal? Well....maybe, maybe not.
Here's where shit starts getting pretty grey
Fan work is not remotely protected by any copyright or trademark law and never has been, at least not when using the actual branding and content of the IP in question. But the mechanics of game-play don't actually have anything copyright-able to them as it comes down to how an idea is expressed that is copyright-able, a perfect example of this is the 1981 case of Atari v. Amusement World (C) [D. Md.] over their game Meteor, which was even by the courts admission an Asteroids "clone". But it was determined there were not enough visual similarities nor any code plagiarizing to actually qualify the game as copyright infringement. But that's the thing, for all intents and purposes these were the SAME game, but since they didn't infringe on the assets or actual IP, the case was ultimately ruled in favor of Amusement World, stating that "Without substantial similarity of protectable[sic] expression, there can be no copyright infringement. While Amusement World based their game on Atari's Asteroids, Amusement World only copied the idea, and not the protectable[sic] aspects of the game".
Rulings like this one are the same reason that we now get to see all of these mobile games that are all various clones of "Candy Crush" or "Bejeweled", that don't get into legal scrapes y'know, till someone starts trying to trademark silly words.
Also take the recent No Mario's Sky (the Mario meets No Man's Sky parody). It too got hit with a DMCA from Nintendo during this wave. But the creators basically knew it would happen, and prepared new assets ahead of time to replace anything with a visual likeness to Mario (trademark infringement technically, since the visual assets were custom-made), and the music (copyrighted) or anything Nintendo and then renamed the game "No DMCA's Sky" and put the game right back up again. In doing so, it's still the same game they made, and wanted to make, but it doesn't hold the brand-name and visual content that got them in trouble with Nintendo.
Why is none of this Fair-Use?
Well I think the big problem is a gross misunderstanding of what fair-use is to begin with.
(in US copyright law) Fair-Use is the doctrine that brief excerpts of copyright material may, under certain circumstances, be quoted verbatim for purposes such as criticism, news reporting, teaching, and research, without the need for permission from or payment to the copyright holder.
Well the problem is, these fan games do none of those things, or at least I've never heard of a single one that does. Fair Use would apply instead to, for example, a game reviewer using footage or branding, etc of a title in order to inform their audience about a game.
Brace for Homages
People who want to make fan-games just need to accept that they can make homages to their favorite brands, even that have the same mechanics, but they can't plan to ride on the brand-name or IP itself.
Perfect examples come from some of the games that have sprung up in the wake of Five Nights at Freddy's. One such in particular (conveniently enough also on Game Jolt) is Five Nights at Candy's. Ignoring the rather obvious name similarities, which could still potentially be a trademark issue (note: I did not investigate if Scott Cawthon owns any trademarks on his title prior to writing), this game is very much the "Meteor" to FNAF's "Asteroids", and that's ok. Because FNAC's is a homage to FNAF (all these acronyms getting to you yet?).
What FNAC's does right is take the gameplay of FNAF's, add a few new mechanics such as night vision, and has it's own host of original (if eeriely similar) characters. In doing this the developer has been able to share their love of the original game, but doesn't really have too much to worry about in terms of a DMCA (presuming they haven't ripped any content I'm not aware of).
So if you want to make a fan game, do it. But make it a homage, a clone if you will, and give it your own twist. That's what makes it yours and shows what you can actually do after all.
And honestly, that seems fair to me.