Legally speaking (and this is coming from Campbell v. Acuff-Rose, the 2 Live Crew case, which is pretty much the case any parody issue involving copyright will turn to immediately for resolution): Parody is the use of portions of a copyrighted work to make a comment or criticism *reflecting on that work*. Satire is the use of the work to make a comment or criticism of a larger societal issue. Parody is near per-se protected under fair use; satire isn’t, having to fall back on the §107 factors.  The line can be hard to draw; here are some examples.

Campbell v. Acuff-Rose: Pretty Woman’s lyrics changed to criticize the notion of womanhood presented in the original song. Parody: reflects on the original.

OJ/Cat in the Hat case (I forget the cite): Dr. Seuss’s Cat in the Hat trade dress and patterns used in a book about the OJ Simpson trial. Satire: use of work to talk about an external issue.

Mattel v. MCA Records: Mattel sues Aqua/record label for use of their trademark “Barbie” in their song “Barbie Girl”. Parody: the song comments on the image surrounding Barbie and invokes it to criticize/comment on the unreality of it.

Parks v. LaFace Records: Rosa Parks sued Outkast for their use of her name/likeness rights in their song “Rosa Parks”. Not protected – the use of her name was simply to invoke her image for their own monetary purposes, there wasn’t any use of it to criticize or comment in any way. Not even a satire.

Essentially, the Downfall memes are *not* parody because they use the original copyrighted work as a vehicle to comment on some external issue (for example, DMCA takedown notices), not the original work. A hypothetical Downfall meme criticizing the concept of Hitler embedded in the movie would likely fit under the legal parody definition, but most of the ones I’ve seen wouldn’t. They may still be covered under fair use, but the analysis gets more complicated.

Essentially, fair use is a balancing test, weighing four factors against one another; the purpose and character of the use, the nature of the work, the amount taken, and the effect on the original. A quick fair use analysis example, using a hypothetical Downfall meme video talking about Ben Roethlisberger being a rapist. I’ll also note: fair use is widely recognized as an INCREDIBLY murky area of law. Other people may conclude differently than I have, quite reasonably. For example, the EFF thinks this is a clear case of fair use; I think it *should* be, but isn’t clearly so under the current state of the law.

Purpose and character of the use: this is also often known as the transformativeness factor, in that the degree to which the original has been used to contribute new expression or new aesthetic value is transforming the original into a new work. It also invokes commercial/noncommercial distinctions. Here, the uses are non-commercial (by the user, although you have to think about how Youtube stands to benefit from commercializing them, and whether that’s going to come into the analysis) and the work is transformed to some degree, although not extensively. This factor probably weighs weakly in favor of the defense.

The nature of the work: both works are expressive works of art. This factor is neutral; neither side wins. (If one work had been more factual, or if political speech was involved it might weigh weakly to one side or another, but generally fair use analysis ignores factor 2 to a pretty significant degree.)

Amount and substantiality of the piece taken: this is both a quantitative and qualitative evaluation. The quantitative amount taken is fairly low; 4 minutes or so out of 120 minutes, percentage wise, is not huge. However, it’s identified as one of the climactic scenes in the movie, so it does have some substantial amount of meaning in the original work. Probably a push, maybe weakly in favor of the plaintiff.

Finally, the effect on the original factor. Here is where (along with transformativeness) I feel existing law really has it wrong in terms of how widely they’ll look for an effect. That said: this is probably unlikely to have much effect on the market for the original. There’s no real reason to believe the filmmaker is going to want to license that four minute segment for these purposes, so no reason to believe this is going to harm a potential market. As such the real question is whether the clips will raise, lower, or not affect demand for the original. Historically I think this would have been looked at as harmful to the original – people will watch this and potentially be less likely to watch the original (looking at the video trailer cases, for example, though those are not perfectly on point) – but I think a modern court might be more receptive, if not perfectly so, to the argument that this is actually increasing demand for the original by making people aware of it. However, I’m not sure that that argument will be bought, and as such I’d say this is probably a push at best, possibly weakly in favor for the plaintiff. And that’s why I say it’s unclear/arguable what their real fair use status is – the weighting factors are going to come out near neutral (especially since courts tend to embrace factors 1 and 4 to a much greater extent than 2/3) and as such, an actual suit on the topic could go down either way.

(Complaints by users who’ve suffered takedown that YouTube isn’t protecting them ignore the fact that YouTube only receives their safe harbor from being sued because they do comply with takedown notices; the proper alternative is to file a counter-notification. After Universal v. Lenz, there’s a lot of incentive for companies not to file improper takedowns, and a decent incentive for users to counter-file.)