This is a pretty good example of the craziness of our copyright laws. William Faulkner has been dead for over fifty years. Woody Allen had a character paraphrase one of his quotes in an utterly transformative way. Yet the film studio got sued for it and had to litigate.
At least Woody & Co. won, so that's some vindication for the law. But the case exposes two problems:
1) Copyright lasts too long. There is no reasonable justification for Faulkner's heirs to have a monopoly right to his works so long after his death. The main idea of copyright is to provide an incentive to produce works of art, etc. You could argue that providing for one's heirs gives some extra incentive, so a few years of posthumous exclusivity is justifiable. But current US copyright lasts for 70 years after the author's death. That's just absurd.
2) The contours of "fair use" are too fuzzy, which creates a playground for bullies and their lawyers. This creates a serious chilling effect. Particularly when there is a lot of money on the line, a copyright owner can threaten to sue for an injunction. Holding up a movie's release date is a serious threat that can do millions of dollars of damages in a very short time. So usually it's worth it just to cave in and pay some ransom.
It's all pretty nutty.