Has anyone actually made the argument that having an AI regurgitate a word for word copy of an otherwise copyrighted work is fair use? Or have they made the argument that training the AI is transformative and fair use, and using that AI to generate works that are similar but not duplications of the copyrighted work is fair use?

A xerox machine can reproduce an exact copy of a book if you ask it to, but that doesn't make a xerox machine inherently a copyright violation, nor does it make every use of a xerox machine a violation of copyright, even when the inputs are materials under copyright. So far the judge in this case has ruled that training an AI is sufficiently transformative, and that using legally acquired works for that purpose is not a violation of copyright. That outcome seems entirely unsurprising given the years of case law around copyright and technology that can duplicate copyrighted works. See the aforementioned xerox machines, but also CD ripping, DVRs, VHS recording of TV shows, audio cassette recording, emulators, the Java API lawsuit and also the Google Books lawsuit.