"sufficiently transformational" is carrying a lot of water here. At minimum it would cloud the issue and might expose anyone using AI to lawsuits where they'd potentially have to defend each generated image.

Oh, interesting, I didn't realize that's how it worked. Thanks for the additional context around this. Guess it's not as upending as I thought it could be.

Not if it is AI generated. So far only humans can be original enough to warrant copyrights, at least in the US .

BTW, the right to prepare derivative works belongs to the copyright holder of the reference work.

I doubt that many AI works are in fact derivative works. Sure, some bear enough similarity, but a gross majority likely doesn't.