[Your Nightmare]

You left out a critical sentence.

"In presenting Plaintiff's Program, defendants sought to critically examine the quality of plaintiff's "Public Access" television show."

Once again, The Daily Show was parodying/criticizing the work they were copying. I don't believe they would have been able to use other copyrighted materials in their parody/criticism of "The $andy Kane Comedy Show." e.g. they could not have played Frank Sinatra (a more palettable example than Eminem) in the background without permission from the copyright owner.

[Your Nightmare]

palettable = palatable

[FBD]

You could be right.
However, there does appear to be some (Plenty of)gray area in"fair use" , regarding this.