In principle by using copyrighted and trademarked content, putting it in your own setting and distributing that you are going against the law. This means that Nintendo can send you a cease and desist letter, and you will need to comply.
While a lot of people might try and argue that it might be fair use, if you don't comply with a C&D, Nintendo would drag you in front of a court, because that is the place these kinds of things are discussed. The issue with this of course is that you are extremely unlikely to win, and this will cost you quite a bit of money.
Luckily for us, Nintendo hasn't sent too many of these recently. We try to keep on Nintendo's good side by keeping all Pokemon content strictly non profit. This is why recently a lot of fangame developers got angry at another game (Generation 0), as he tried to sell alpha builds of his game. As we all love our fangames, we don't want this to happen. Therefore, keep all games using content of Pokemon strictly non-profit.