My main problem is their current judge seems to feel there is merit in the idea that its protected by law and not just a nuisance case against a supplier who upped their prices and refused to offer apple the deals all the other suppliers do.

It is illegal to distribute, personal use is a grey area in most countries and downloading it is also technically illegal as your are aiding in the distribution of an illegal work..
so it goes:
Making for personal use = grey area as you don't intend to let other people see it
Distribution without permission of copyright holder = illegal
Downloading said item = aiding in the distribution of an illegal work which in most countries is in itself illegal

Now in the US there are fairuse laws that allow for parodys to side step it (see the strawberry shortcake/Penny arcade case on this though as it's a very narrow allowance and penny arcade ended up taking it down just in case...) but that is a specific case...

If a fan game is just loosely inspired by a commercial game and every game content (software, graphics, sound wise) is created new, than I don't see many problems.

http://en.wikipedia.org/wiki/Sweat_of_the_brow

Of course trademarks of any form cannot be used, but for the new work even the fans can claim copyright. The only problem is to define the thin border where something is just a plain copy of something or it is a creation of its own. Especially parodies allow to easily use a lot of original ideas and still being seen as new creation.

I would say, if fans think independently about a game, create the content independently and just let themselves inspire strongly by an existing game, there is not much to worry about. After all, commercial games also are influenced by their predecessors. It's natural.

Just don't copy whole parts 1:1.

You always face a certain legal risk to be accused of violating copyright, whatever you do. To protect yourself, maybe just found a small company/society before and develop the game in the name of this company/society. Just in case, hostile lawyers close in you can sacrifize the company instead.

But by far the more difficult thing is to actually get the game done, always. ;)

yes but by the time you reach this point you've actually moved on from the fan game to full game (you will have no shared names, characters, areas, graphics or sounds by this point)

Basicly does it say something like "Final Fantasy 4.5"? etc or not if not and it's setting etc are original its legal