We have designed software and an accompanying site to convert images into 48x48 (or larger) LEGO mosaics; we use the current LEGO color palette, use image dithering to improve color availability, since the LEGO palette is rather limited (an example of dithering: putting red/blue blocks in a checkerboard pattern creates the illusion of purple at a distance), and finally improve the coverage of regions of the same color by using clustering to cover such regions using, e.g., 2x2 or 2x4 plates instead of only 1x1 plates (since, for example, a 2x4 plate is cheaper than eight 1x1 plates).
We searched and saw that others have been doing something like this as well, e.g., Brixels and Pic-A-Brick on Kickstarter, but these projects either use monochrome 1x1 plates (Brixels) or don't provide the actual bricks, only instructions (Pic-A-Brick). So our idea still seems feasible.
A problem is ordering the correct plates in the correct color per order in a cheap and straightforward way (although this could initially be done through PAB), so we contacted LEGO, explained our idea, and asked if they could provide us with a more straightforward/cheaper way of ordering. To be clear: BrickLink is too cumbersome given fluctuating brick availability/prices and multiple shipping fees when ordering through multiple vendors, and stocking up on LEGO K-boxes is economically infeasible given the "color x plate size" combinations that are needed (each K box only contains a brick of a single size and color).
LEGO's response: our idea would/could be in violation of LEGO's Fair-Use Policy (FUP), and we might want to talk to an IP lawyer before proceeding. We don't fully understand this; if we clearly state (at the top of our page and well visible) that our product is not created by the LEGO company, that we are not affiliated with the LEGO company, and that we only use official LEGO bricks (bought, e.g., through PAB) to create our own end product (the mosaic) without using the LEGO logo anywhere, how is that a breach of the FUP? If I build, e.g., a computer using parts of different vendors, I can still sell it as my own brand of computer, as is done by many vendors/computer stores. The same holds for cars and many other machines. How would this be any different from using LEGO blocks as "ingredients" for a product that one wants to sell? Let's make it even more explicit: Brickmania seems to be doing exactly the same thing: commercially selling custom LEGO kits (war-related; something which LEGO itself doesn't do) using actual LEGO bricks (no knock-offs) and they seem to be allowed to do so (by the way, they do a good job as far as making clear that their products are not produced by the LEGO company goes).
So it has become quite unclear to us if something like this is or isn't allowed (the initial response by LEGO read as a standard response sent to anyone who might be breaching the FUP - but we somehow doubt if this is really the case for us). If we make abundantly clear that our product isn't created by the LEGO company and if we follow the rules when it comes to (not) using the LEGO logo, licensed brand names, etc., shouldn't that be enough?
We don't want to use knock-offs and understand that LEGO needs to protect its own brand, but by providing a response like this, we have (ironically) been considering using clone bricks (if possible), while we'd actually like to use quality LEGO bricks that customers can mix with their existing bricks.