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Technically the films would count as parodies, they didn't actually do anything illegal.
However, the store was making money off of the parodies, without permission of the original makers.
Which is completely legal.
Not really. In the case of That Guy with the Glasses, they make money off of the advertising of their videos, which contain Fair-Use copyrighted material. Making money directly, through the sale or rental of the tapes, is illegal.
Plots you can use in new works, but I'm guessing using copyrighted titles of other movies as your own would be illegal. It's the same reason They Might Be Giants had to call their song "AKA Driver" instead of "Ny Quil Driver". Free speech applies to content of a work, but the title of a work is trademark infringement.
You also can't copyright a title. You can trademark it, which is some extremely stupid legal distinction.
I thought they didn't get in trouble because of the content, rather because of the tapes themselves. Like, because it was illegal to tape over them and use them for money-making purposes.
It's more they were marketing and selling the tapes as if they were the real deal (with the original box-art and cast-listings including people who had nothing to do with making the parody).
What they did may or may not have been legal. There was a similar lawsuit involving Clean Flicks, but it was settled out of court, so the issue was never decided. They aren't making unauthorized copies since they are recording their movies on tapes that were already licensed to have that movie. They were repurposing an existing copy of a movie, not making a copy. This is besides the parody issue.
I thought there was a ruling, district Judge Richard Matsch, July 2006. Stating that the edited practices violated U.S. copyright law.
The premise just bugs me. When faced with such a problem, anyone with half a brain would have thought of far less ridiculous solutions.
It's a comedy, not meant to be taken seriously. On top of that, they were both presented as pretty much idiots to begin with, and one of them had just gotten his brain fried (the cause of the initial problem in the first place).