From Ars Technica:
"JibJab's lawyers are arguing that the use of the song is protected by Fair Use, but the Fair Use protections in question usually only relate to parody, not satire. The distinction is usually determined by looking at who's being made fun of. A proper paraody is one which makes fun of the thing being mimicked. So, one would be hard pressed to argue that this short animation isn't protected by Fair Use if it made fun of the original song, but it doesn't. Using the song's general features, it takes aim at Bush and Kerry, and as such, it probably would not be protected." (Emphasis mine.)
"As of yet, both sides are only exchanging heated legal correspondence, but if it goes to the courts, you can expect JibJab to be forced to pull the movie down. For more information, see the EFF's coverage."
The EEF seeems more optimistic.