[Gashlycrumb]

As someone who has done this:

Yeah, it's a copyright violation to do this. Fanfiction is not 'fair use'; it is not a parody nor a review or commentary on the original work. However, odds are, nothing will happen. If the author finds out about the game, then he or she may send a cease and desist. If that happens, shut your game down.

Many authors do not care. Some like it. Heck, Neil Gaiman came along and played on the MUSH based on his Sandman series.

'Kay, so. In trademark law, if you don't protect your trademark, by filing legal objections to other people using it, you can lose the trademark. Copyright law does not work that way. You can't put an author's rights at risk by creating fanfic. Sometimes authors are confused about this and spaz out. But eventually the author learns that copyright law doesn't work that way, and then takes up the Sane Author's Policy On Fanfic, which goes, "Do what you like, just don't send it to me or try to fool anybody into thinking I had anything whatsoever to do with it."

The RPG vs. fanfic question gets things a bit tangled. When I opened my game, a 'Song of Ice and Fire' game, I said, "George R.R. Martin has specifically said he hates fanfic, BUT he has also sold the rights to make an RPG based on his world. He is not accessible to ask for permission, but I think that the existence of that game is evidence enough that I'm allowed to role-play in his world." Later he put up that Sane Author's Policy On Fanfic on his blog-thing, so I feel pretty well covered on both the RPG and the MUs-are-fanfic-engines sides.

If your author has publically stated that s/he doesn't want people doing that stuff, well. Don't. Not 'cause you'll get into trouble (except for the trouble of creating a game and then having to take it offline) but because it's rude.