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Apparently there was a case in 2013 where the fan game My Little Pony: Fighting is Magic got taken down by Hasbro.

This makes me wonder, why did it not fall under fair use in terms of Parody?

This article by a legal information website says

[...] a parody is a literary or artistic work that imitates the characteristic style of an author or a work for comic effect or ridicule. It is regarded as a criticism or comment on the original copyrighted work. In simple terms, it has to convey to the audience some type of message about the original work. This “message” fits can be understood to transform the original work (the work that’s being parodied) because that message is adding something new; it takes all or part of the original work and gives it a different purpose or character. [...]

Making a game about characters from this TV show fighting each other, when in the series it's all about loving each other could be seen as criticism or comment on the peacefulness of the original characters. So why doesn't that count as parody?

In a related fashion, I'm thinking about a game where giant dynamaxed Pokemon unleash death and destruction onto the world. If PETA's Pokemon clone is parody, wouldn't an overly brutal version of Pokemon be parody as well? I would be creating my own assets.

What exactly is and isn't parody?

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The details of this specific matter are not clear because it appears that Mane6 relented in response to a cease and desist letter, rather than be dragged through court. Since we are not privy to the letter from Hasbro, the best we can do is guess based on the degrees of freedom that exist under the law. The claim that this game was a "parody" is an affirmative defense that Mane6 would have to raise in response to a copyright infringement claim (we don't know if there were also trademark infringement claims in the letter). Then the jury would look at the arguments of the two sides to determine whether this was really "fair use", performing the "balancing act" to see how much of the original work was copied, how transformative the derived work is, what the effect on market would be. The lines drawn for making these judgments are not bright. A quick scan of a successor product Them's Fightin' Herds suggest that someone thought the artwork was too substantially similar to the Hasbro product, that is, the fighting pony version was judged to not be transformative enough. Since it didn't go to court, we'll never know.

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