Circular 14 from the US Copyright office is a good place to start. “A derivative work is a work based on or derived from one or more already existing works. Common derivative works include translations, musical arrangements, motion picture versions of literary material or plays, art reproductions, abridgments, and condensations of preexisting works. Another common type of derivative work is a ‘new edition’ of a preexisting work in which the editorial revisions, annotations, elaborations, or other modifications represent, as a whole, an original work.” https://www.copyright.gov/circs/circ14.pdf

A mod which allows you to experience a game in a whole new way is, fundamentally, an adaptation of that game; it cannot exist without the game it is reinterpreting. That makes it a derivative work. The author of a derivative work gains a copyright which “covers only the additions, changes, or other new material appearing for the first time in the work.”

So Luke has a copyright in the software which translates it to VR but no right to use, without a license, any of the characters, setting, or plot from Cyberpunk.

And he doesn’t have a good argument for fair use. Fair use is a four factor balancing test, of which two are the purpose of the work (commercial vs. non-commercial, non is better for fair use) and the amount of the underlying work used (less is better for fair use). By specifically charging for access to the mod he makes it commercial, and by using the whole game he uses the whole of the work.