Copyright law is not trademark law, nor is it patent law. “Prior art” is relevant to patent law (which essentially protects novel ideas/inventions and/or ways of doing things), but not relevant to copyright law (which protects a particular expression of ideas, but not the underlying ideas). “Confus[ion] in the marketplace” is relevant to trademark law (which protects brands and branding) but not copyright law.
Selling a Star Wars toy adds value to the movie, and toys are not misconstrued or confused in the marketplace with the movie—nobody goes out to buy/see the movie and accidentally buys the toy instead. That doesn’t mean I can make my own Star Wars toys, because both copyright (in the expression of the Star Wars characters, such as the outfit and appearance of Han Solo) and trademark (in the “Star Wars” brand) would protect them. Patent law, on the other hand, would likely not protect them.
Also, show me a court case where they decide if something is “too derivative.” Actually, first define what you mean by “too derivative,” because it’s not clear to me what you’re saying.
EDIT:
Derivative works are, as the name implies, derived from something. If that something is under copyright (i.e., hasn’t yet fallen into public domain), then you generally need permission to make a derivative work (though a Fair Use defense is always possible). The author of the derivative work then gets her own copyright in her independent contributions to the derivative work, but the original author retains her copyright. So JK Rowling has copyright in Harry Potter and her characters, and Warner Bros. needed her permission in order to make the movies. Warner Bros. gets copyright in their original contributions as seen in the film, but JK Rowling retains copyright in her characters.
Note that if you’re arguing that something is a derivative work, you’re essentially conceding that there has been copying of the original work in some way. The copying doesn’t have to be verbatim, and simply changing the physical medium—be it from books to film, or carpet to camouflage—doesn’t mean that there is no copying. The basic test for whether there is copying is known as “substantial similarity.” Here are a couple of examples to illustrate how broad the substantial similarity test may be, as in both cases courts have found there was copying:
Also, in the Shephard Fairey suit, the question essentially wasn’t whether the poster was “too derivative,” but whether there was any copying of the plaintiff’s photograph at all. Fairey’s initial defense was that his poster was not based on the AP (i.e., plaintiff’s) photograph but on another photograph. It turned out the Fairey not only had been lying about this, but had destroyed evidence that would have showed he had copied the AP photograph; when this was disclosed the case was settled without trial.
