"Can I use this licensed fabric that I purchased at [Brand Name Store], make something with it, and sell it?"
This is a question that comes up a LOT in business groups. I mean A LOT. It comes up often in my own Facebook group [here]!
First, I want to say that I am not an IP lawyer, but have talked to quite a few. Even still, there may be slight variations in interpretation which is why some cases must go to court for a judge-provided ruling (much like the case of Precious Moments, Inc. v. La Infantil, Inc.).
Usage of any licensed fabric/embroidery file/image for finished products is always a defense, not a right. The intellectual property owner is within their rights to protect their registered property, and their brand reputation, to the fullest extent of the law.
While reading, keep in mind that Copyright law and Trademark law are two separate areas with their own set of regulations.
What about fan art and inspired works?
Inspired by/fan art etc: Fan art is supposed to be for personal use. The second you try to sell it, it can become a violation. Sorry, but those custom knit groups/businesses are risking a lot (but they do have amazing art work and really should connect with D!).
What if I say "inspired by" or "not affiliated with"?
This is just admitting fault. While a company may allow use with this statement, it is on a case-by-case basis and you will have this permission in writing.
What about parody?
You can absolutely do this! Can you sell it? You probably could under copyright laws (not trademark), but it would come down to definition (Sectio n107 of the Copyright Act) and potentially a court. Parody: a comedic criticism or commentary about a work that requires imitation. (Also see Campbell v. Acuff-Rose Music, Inc.)
What about old books that are in public domain that share characters with big names?
Ahh, I actually really love this question! YES. You can 100% use those characters as much as you want and sell your things too! BUT. (Oh, you knew there would be a 'but'.) The character cannot be inspired by the "big name company", only the book. You'll see a lot of Peter Pan, Through the Looking Glass/Alice in Wonderland, and A.A. Milnes' Winnie the Pooh (no red shirt) because these are public domain. Grab some inspiration from old tales and fables and create something amazing!
What about the % of change deal?
I don't know where this even started, but I say this: "If it looks like a duck..." You are essentially making money off of someone else's creative property. There is no real % for this kind of thing.
But I purchased the licensed material from the store...
On the selvaged edge, however, it will typically state "For Personal Use Only" or "For Non-Commercial Use Only". This means that you can purchase the fabric to make stuff for yourself, but not to sell.
What about "First Sale Doctrine"?
In short, the First Sale Doctrine is for Copyright intellectual property only and basically states that you are free to resell unaltered items. Once you alter the item, it becomes something new and could become a violation of the IP owner's rights. To find out if it is, you must go to court for a judge-given ruling. Each lawyer and each judge will interpret it differently. Be vigilant in getting an interpretation from someone that is working for you in your specific situation. (See United Fabrics Int'l, Inc. v. C&J Wear, Inc.)
But I can't afford a lawyer:
You don't have to afford a lawyer. There are colleges around who educate and train people to become lawyers, utilize the instructors and possibly the senior students when possible. SBA.gov has many different volunteers available in various places around the country, utilize their services by visiting their offices or calling them. Google is also a good resource to find attorneys who may meet with you or speak with you over the phone about what they can and cannot do for you free of charge. Many attorneys offer low cost consultations for various topics.
Dana Bucy Miller of DM Law, LLC is a wonderful resource for intellectual property questions and someone Ive spoken with before (frequently among other lawyers). She offers some quick phone calls as well as more in-depth consultations so you get a full sense of potential solutions for your questions.
Keep in mind: If you spent endless hours on an image just to have someone else "recreate" it and sell it, how would you feel?
Note: Embroidery files are another beast of its own. If you purchase an embroidery file that is not legally licensed, the IP owner may subpoena the vendor's records of who purchased. The same may hold true for fabric and other items, but I have not seen such a reaction yet.
Here's a good article from The Mouselets if you are interested in reading another perspective.