Surprisingly, it was Fariey who sued AP. He was seeking a court declaration that he did not violate AP's copyrights. AP countersued, claiming copyright infringement. Now a US judge has dismissed the case, but a trial date remains reserved for AP suits against companies that made and sold merchandise bearing the image.
The dismissal of the suit is unfortunate because the trial would have resulted in case law that would further clarify issues of concern to artists around "fair use," appropriation and about how much the changing of the image made it "art" and a fair and legal separate entity from the photograph that inspired it.
Andy Warhol faced issues and court cases like this when he appropriated Brillo boxes and press photos of people like Jacquie Kennedy, but the changes to copyright legislation in the US and Canada that erode artists' rights have changed all the rules. Consequently, new copyright cases involving artists may affect all of us who appropriate to any extent at all.
Artists "appropriate," "reference," "honour," "caricature" and do any number of other actions with different names that all involve, to some degree, the bringing to mind of other well known imagery as part of their creative process. It is something many artists do without, sometimes, understanding the legal implications.
Google Shephard Fairey to learn more.