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You’re not wrong, but being free does make a pretty massive difference in this context. After all, there are literally hundreds of pokemon mods for other games, and hundreds more fan games and romhacks. Some of them are huge, like Pokemon Infinite Fusion has a discord with over 400,000 people. The only time Nintendo decides to come after those projects is when they start trying to make money.
Right, yes. Whatever the legal situation, there’s always the chance that Nintendo doesn’t come after you because you aren’t seen as commercially profiting, even though it doesn’t affect the fair use analysis.
But also, Nintendo absolutely has at times gone after projects even if they don’t make money - they are the not always the most aggressive, but they are very unpredictable.