Hi again ailsadell,
Yes in the UK the doctrine of exhaustion of rights would apply to fabric and a purported licence term printed on the selvedge would have no effect. There are several reasons for this, mostly involving other areas of the law, such as contract law.
Putting it as simply as I can, when Disney licenses a company to make a product, whether it is a figure, a book or fabric, bearing some of Disney's intellectual property, the contract is between just those two entities, and only those two entities are bound by any licence restrictions. Between most end users (crafters in this case) and the manufacturing company which is operating under licence there will be a minimum of two intermediaries, usually including an importer, a wholesaler and a retail outlet. If you buy online it is possible that a couple of these steps may be combined in one company, but it is highly unlikely that an end-user would deal directly with the manufacturer. None of these intermediaries are bound by Disney's original licence terms. If the manufacturer was required to ensure the terms were adhered to throughout the supply chain, they would need to have in place the necessary trading terms which bound the next link in the chain to only sell the fabric on the terms stipulated by Disney. When the end user buys some fabric they would need to be specifically informed by the retailer of the limitation before purchase, and agree to be bound by that limitation. Failure to do this would be contrary to the Sale of Goods Act 1979, and the Unfair Contract Terms Act 1977 and their subordinate secondary legislation. An unfair term is one which it is not fair and reasonable to include in a contract of sale "having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made". There is plenty of caselaw to show that any term which is unusual in the circumstances (ie is not normal practice) must be drawn to the customer's attention before the point at which the sale is concluded, or the term is not binding on the customer (see Regulation 8
of the Unfair Terms in Consumer Contracts Regulations 1999). Informing the customer via a message on the selvedge would not come close to meeting this requirement.
There are just a couple of other points worth clarifying. Often, Disney's threats of action will involve trade mark law. Many Disney characters are registered as trade marks and this would prevent someone from selling goods from another, unauthorised source using any of the trade marks. I can't sell a car with a Rolls Royce badge on it if it isn't actually made by Rolls Royce. However if an item legitimately bearing a registered trade mark is sold then there is no infringement of that mark if the item is subsequently re-sold, because of the doctrine of exhaustion. I can sell my Rolls Royce complete with its badges, and even advertise it as a Rolls Royce, and none of that would infringe any registered trade mark (see section 12
of the Trade Marks Act 1994). Sub-section (2) of section 12 TMA then leads on to another of Disney's claims, namely, that the making up of the fabric into something else (a duvet cover for example) would be an unauthorised adaptation under copyright law (contrary to section 21
of the Copyright Designs and Patents Act 1988) and also nullifies section 12 of the Trade Marks Act. This is nonsense. In making up the fabric, the underlying copyright work (the artwork printed on the fabric) is not altered or added to, and in any case that is the purpose for which fabric is sold. Secondly, section 21 does not apply to artistic works which is what the printed fabric qualifies as. Similarly with section 12(2) of the TMA. A trade mark is used to indicate the origin of the goods being sold. Irrespective of what may subsequently be done with the fabric, it remains the genuine licensed product and therefore the presence of, say, Mickey Mouse images, all over a duvet does not infringe the trade mark (see section 10(6)
The nearest Disney gets to having a valid claim is under the commonlaw tort of passing off. You can read about what constitutes passing off here
. Suffice it to say that Disney might argue that Mrs Sally Crafter selling a duvet made from Mickey Mouse patterned fabric using the description 'Mickey Mouse duvet cover' might in certain circumstances lead a potential buyer to think that this duvet was a genuine Disney product and that when the stitching came apart after just a few days, this would damage Disney's goodwill. It is not an argument which, as far as I am aware, has ever been run in a UK court, but it might just succeed, especially if the workmanship of Sally Crafter was particularly poor. To prevent a passing off claim, sellers of goods made from Disney-licensed fabric need to ensure all their advertising and labelling has a prominent disclaimer which says that the duvet etc is not manufactured by Disney, just the fabric. If that is done, then using the words (in this example) 'Mickey Mouse' becomes purely descriptive and is permissible (see section 11(2)(b)
And lastly, I am not aware of a case like the one you describe in which a crafter was 'fined' a huge sum. If there has been such case then it is likely to have been in the USA where, if statutory damages are awarded, the cost to a defendant can be huge. If such a case exists, I would think it is probable that the crafter failed to defend the suit or was poorly advised, allowing Disney's legal team to get a default judgment (ie they didn't need to prove the case against the defendant). Intellectual property case decisions in the US courts can vary wildly.