The big question is: if copyrighted material was used in the training material, is the LLM's output copyright infringement when it resembles the training material? In your example, you are taking the copyrighted material and giving it to the LLM as input and instructing the LLM to process it. Regardless of where the legal cards fall, this is a much less ambiguous scenario.
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I think Disney ran into this with people generating Marvel characters etc
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