Fan fiction is something that's been around for decades, but with the advent of the internet it's become much more popular. Essentially, fanfic is written by fans of a particular story; the quintessential example is Star Trek, but the concept goes back before then. And, of course, the Internet made the whole thing much more popular. If you're not familiar with it, this article will get you started... head over to George R.R. Martin's post to get the other side of things. The comments in both are pretty interesting.
I can understand the annoyance of authors who find fans playing around with characters the author created, and often doing things the author would never contemplate (there's a whole subset of Star Trek fiction about Kirk and Spock...). I do think it's better to look at it as a marketing tool. If you're lucky enough to have an audience enthusiastic enough and large enough to write fiction about your creations, you're getting additional value from their spreading of your ideas. Yes, you must make sure users know the difference between fanfic and the real, authorized (so to speak) fiction. Really, though, having an enthusiastic army of fans helping to push your IP is a benefit.
Make a clear statement about how you feel about fans using your IP (this is true of game publishers as well as authors). Perhaps use some of the Creative Commons licenses; you can modify them to suit your needs. Establish the ground rules and what fans can and cannot do, then encourage them. Use their enthusiasm to help drive more people to your sites where they can buy your products (you did put in the ground rules that all fanfic needs to contain a link to your web site, right? Even better, a trackable (unique) link so you can count how many people the fanfic brings in).
Social media marketing is time-consuming and labor intensive... if you can get fans to help you with it, and they enjoy the process, that sounds like a win all around.
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