This subject has been bothering me for a while now. Ever since Nintendo recently put the kibosh on over 500 fangames, it has got me wondering whether or not the legality of fangames is really something that companies need to fuss over. I get that fangames are technically illegal because most of them contain unauthorized use of characters, music, or assets owned by another company, but 99% of the time the game in question doesn't pose any harm to the company or the image they represent. They're just little distractions that were made by a fan of that series as a symbol of how much they like those games. And it's not like a lot of these fans are trying to make any money off of those games, and most of the time they even give credit to the original developers. Now I can definitely understand why these companies would be so protective of their property, but they aren't exactly going about it the right way. They need to figure out better, more tactful ways to deal with this without damning the person or people that made them. It just creates poor PR and bad blood with the fans. Let me elaborate...

1. More often than not, when a fan-dev makes a fangame they are showing their appreciation to the company that made the original work. Most of the time they mean no harm in their intentions and just want to show how much they like the game or series that inspired them to make their own with their favorite characters. However sometimes when the fan project gets shut down, it breaks the heart of the fan sometimes even making them think that their favorite game company doesn't care about what the fans think at all.
2. They give potential future game developers a good jumping off point in which they can get into the field of game design, but if the project gets shut down relatively early in its development cycle, it becomes rather dejecting to the fan-dev thinking that game development just isn't for them.
3. Some fangames promote awareness of a franchise or series that might not be selling well or have been neglected by the owners of the original IP. Now this is where things get a little gray. Whether or not if the game gets canned, this still promotes awareness for the series in question. It just happens to work better if the game gets finished first.
4. Fans gain more from the experience of fangames and official works combined than from the official works by themselves. It is actually quite common for a fan to run into a fangame that is of extremely poor quality and makes them appreciate the polish that went into the official series more as a result. But in the event that a fangame is really good, it makes them not only appreciate the original work, but applaud the effort that the fan-dev made to make it as close to the original series as possible and anticipates whether or not if they will make anything original later.
5. Much like video game piracy, fangames WILL happen with or without the IP holder's consent and trying to police this and prevent it from happening is a fruitless effort that not only wouldn't accomplish anything, but would alienate any future game devs from making their own original work down the line.
6. Fan-devs gain more from encouragement than from a cease and desist. It costs nothing to allow them to keep their finished work up for others to play, and more often than not will not affect their sales much if at all. Most fan-devs even encourage the fans that play their games to buy from the original IP holders so as to offset their involvement in making their little project.
7. If a fan-game is good enough, it benefits both parties more if the original IP holders buy the rights to the fan work and/or ask them to port it to a system they regularly develop games for. Non-canonical works by the original IP holders do exist in the video game industry and fangames always fall under this as they have no legal rights to any of the characters, music, assets, etc. that they borrowed from.

Now with the advent of more user friendly game development tools like Unity, Game Maker Pro, RPG Maker, and the upcoming Mystic Searches S.T.A.G.E, it has become much easier for fans to get into game design. So what should the big gaming companies do? First of all the way I see it, STOP BEING SO STRICT. A hundred or so fangames that happen to contain assets from your works is not the end of the world. Your paychecks aren't going to be affected any from a few practice projects. Secondly, if you see one that looks promising, ENCOURAGE THE DEV. A few kind words can go a long way, especially if you can get a profit from it in some way, shape, or form. And lastly (and this is most important), if a popular fangame is of a series that hasn't seen the light of day in over a decade or so, TAKE THE HINT. It's obvious that the fans want that series to come back, but since you're not doing anything with it, they often take matters into their own hands. The only time you should break out the legalese is when a fan-dev is trying to make money off of their game when it contains many assets your company created. This should be done especially if that fan in question happens to work for a rival game company.

Only time will tell if gaming companies like Nintendo will loosen the leash they have on their property. Many gaming companies like Namco, Sega, and Capcom have already become more lenient on these matters, but while this is a step in the right direction, bigger gaming giants like Konami, Square Enix, and Nintendo still need to unclench and treat the fans as fans and not as parasites. But until then, I'll be seeing you.