A few years ago, Andy Baio over at waxy.org put together a great 8-bit tribute to Miles Davis' "Kind of Blue," which enjoyed a bit of airplay over here at WFMU (click here to listen to the 8-bit cover of "So What"). The album's music was fully licensed from Davis' publisher, but Baio recently had to shell out $32,500 for an out-of-court settlement because of the tribute album's cover art (shown below next to the original album art). You can get the full details of what happened right here, in addition to an excellent overview of Fair Use and some recent examples of other similar cases.
It seems like every few months some story like this pops up and reminds me that the U.S. is in desperate need of clearer guidelines and a stronger legal precedence for Fair Use. The current state of affairs encourages predatory lawsuits, while examples like Baio's case produce a chilling effect on transformative creativity and remixing. Props to the EFF for fighting the good fight in this dept.
I don't need to point out the fact that new art has always been built by borrowing and reinterpreting existing ideas. Or do I?