> your algorithmic distribution of the original works (the model) is a clear copyright violation

Depends on if it's considered "transformative" enough. If Google can cache thumbnails for search, how is an AI model not a "search database+algorithm?"

That said, I do expect that SD will be shut down for copyright infringement at some point because you are right, the model does have a bunch of copyrighted material in it and Disney's lawyers will probably come swifter and more prepared than the defense.