Why is it not fair use for the Chinese models if all they are doing is distilling these fair use models? According to the courts, AI model output is not copyrighted or eligible for copyright.

Distillation does not violate copyright law.

It violates contractual terms of use.

Correct. This seems to be poorly understood.

You can use an original work to write an encyclopedia (e.g. Wikipedia). That is fair use.

You cannot copy an original work and distribute it.

LLMs are an encyclopedia.

But no Chinese company has copied and distributed an American LLM.

Even if they had wanted that, it would have been impossible, because Anthropic et al. do not let anyone access them directly.

Querying the available API can be used to extract only an extremely small part of the information stored in an LLM.

That part can be used for the post-training of another LLM, to obtain some desirable properties, but the extracted information is far too little to be called "copying" or "distributing". Moreover, after the post-training it does not appear anywhere in the weights verbatim, so its use is at least as transformative as the training of the original American model.

Besides these facts, there is no evidence that the Chinese companies have actually done this, even if it sounds plausible.

Terms of Use violation cannot be justified as "transformative" or "fair use".

We’re talking past each other.

No one has claimed Chinese models violated copyright law.

Some have claimed they violated ToS, which is different.