It isn't that derivative works (in the lay-sense of the word) are illegal, it is that derivative works (in the law-sense of the word) are. Which is to say, you are free to write your Vampire Diaries FanFiction, change the names, and publish it for profit (well, you have to do a little more than just change the names, but you get the idea). That is why Dungeons and Dragons can have Halflings without the Tolkien estate kicking their ass.
The problem with non-profit inspiration that is derived from for-profit creativity is that it becomes a form of competition. Of course, the problem with SE is that currently there isn't anything for Crimson Echoes to compete with. But when taken on a smaller scale, with authors and individuals rather than corporations, it is less likely that there will be a lack of competition. Protecting the individual from competition with, essentially, themselves promotes production by enabling skilled artists and the sort to make a living off their work.
Of course, then there are cases like with H.P. Lovecraft, but that really seems to be more of an argument for short-term restrictions rather than long term ones.
