"It seems to me that their grounds are baseless. They claim it is a derivative work, and thus falls under their copyright, but if it contains only a few quotations (protected by fair use) from the original, I cannot see that it is such."
I think they have a pretty good case. As I understand it, a derivative work doesn't need to contain any of the original author's actual words; it could be based on the same characters, ideas, etc, as this one apparently is. (It's title is The Lord of the Rings Diary, after all.) If you can do that, then you can create, say, another Star Wars episode, which would clearly be a violation of George's IP. Whether or not you think it should be is a different matter.
Addendum: Yes, a reference book is exactly the same as another episode, and it'd be cool if they just let him publish it, if they didn't have plans to do one of their own, since it likely helps them more than hurts. But, legally, it seems, it's still easily derivative.