First of all, you are not alone. This is a common problem. I gave a talk to online sellers last weekend and several audience members had similar problems. (Shameless plug, an article I wrote on the subject - legal issues for online resellers - is available for free download from my law firm website. )
The answer depends on the facts, and you should talk to an attorney. I do not know if you have any kind of contractual relationship with them.
If you bought the material legitimately in the United States, then under the first sale doctrine of US Copyright law, you are not violating their copyright rights to resell the material. If you bought the material outside of the United States, then through a strange quirk in the copyright law, you would not be able to resell it without violating their copyright rights (although this very issue is before the U.S. Supreme Court right now).
You can sell the products without violating their trademark rights as long as you do not imply that you are an authorized dealer.
On the other hand, it is common for companies like Pendleton Woolen Mills to try to stop people from reselling their products by threatening to sue, and occasionally actually suing the reseller. You would probably win that lawsuit. But they can certainly outspend you on legal fees, so you would probably lose anyway, even if you win. And they know that.
I would recommend you have an attorney write a letter to them explaining the law, not because they don’t already know it, but to let them know that you know it too, explaining your situation, and promising not to sell any more of their material after you have exhausted your inventory.
Another option is that many people I have spoken with continue to sell similar merchandise and just take the threats of lawsuits, and the occasional lawsuit, as part of the cost of doing business as a reseller.
You state "I presently sell apparel made from Pendleton Woolen Mills copyrighted fabric." So, apparently the availability of apparel made from their copyrighted fabric is depressing sales of the fabric, or they have decided they want to start selling or licensing the sale of apparel. Still, I think the answer from Attorney Marshall is correct. You may have an implied license to use the material for its intended purpose, particularly if you have been doing it for a substantial time or others are making apparel with their fabrics.
I suspect the problem may be more trademark than copyright, particularly if Pendleton sells apparel. Your apparel would then be competing with their apparel and presumably you can beat their prices. Pendleton may be having to handle complaints and returns of your apparel and feel, whether rightly or wrongly, it is lowering their quality reputation. It is at least placing their trademark outside their quality control for apparel.
You certainly have the option to sell the fabric itself. See a local Seattle area trademark & copyright attorney about this. Attorney John Whitaker is one that frequently comments here with high quality answers. You can find him by looking under the Find a Lawyer tab.
I am not your lawyer and you are not my client. Free advice here is without recourse and any reliance thereupon is at your sole risk. This is done without compensation as a free public service. I am licensed in IL, MO, TX and I am a Reg. Pat. Atty. so advice in any other jurisdiction is strictly general advice and should be confirmed with an attorney licensed in that jurisdiction.
Both the previous attorneys gave a good analysis.
While, the copyright issue may be more clear-cut, and the First-Sale Doctrine may protect you, any use of the Pendleton trademark that gives that false impression that clothing you make is actually made by them is likely to be a concern for Pendleton. I would recommend that you talk with an IP attorney to review the fact and review how trademark and copyright may affect your merchandise.
I am not your attorney and do not play your attorney on TV. This is not meant to be legal advice on your situation, but I still hope it will assist you in getting the advice you seek.
It depends on the facts of the case. Such as where did you purchase your "thousands of yards?" You say you purchased it in Portland, Or. It this is the case, then under the first sale doctrine, you may do with it as you wish, but you may not trade on their name by implying the goods are made by or endorsed by Pendleton Woolen Mills. You may however, list that the product is made from fabrics from Pendleton Woolen Mills.
I recommend you have an attorney send a letter on your behalf stating that the materials were legitimately purchased from them, and that under the first sale doctrine, their control of the materials are exhausted. Have an attorney write the letter, because it tells them you are serious about your rights, and that you are not afraid to engage legal counsel if necessary. If they decide to take the case to court, then counter sue for your attorney fees and cost. Good Luck.
I am an attorney licensed to practice in Texas, Louisiana and before the United States Patent and Trademark Office. Laws vary from jurisdiction to jurisdiction and the above may not be an accurate assessment of the laws for your area. The above should be taken as general guidance and not specific legal advice. For specific legal advice you should seek a licensed attorney in your jurisdiction practicing in the area specific to your issue. The above does not constitute or establish an attorney client relationship. If you wish to receive specific advice about your legal issue, then contact my office to schedule a personal consultation.
Your first step is to retain legal counsel. As my colleagues note, this is a complex matter and I am not certain that the equities are on your side. Copyright owners and trademark owners have the right to exclude others from using their copyrighted works and/or implying an association or endorsement by the owner of the trademark. While the First Sale doctrine might protect you under copyright law if you purchased the materials from a legitimate source in the U.S., the First Sale doctrine may not apply to goods that made their way to the outlet store as party of the "grey" market (from a foreign jurisdiction). You say that you received "permission" in the past but the devil is in the details. Did you obtain written permission, and if so, what precisely were you permitted to do? Was this "written permission" in writing and what were the terms?
I suspect that part of the problem here is that Pendelton may have concluded that it did not want its fabric and brand name associated with the products that you make----perhaps it believes that the products are of inferior quality, and that your use of their trademark in connection with these products tarnishes their reputation.
In general, a trademark and copyright owner has the right to exclude others from using their intellectual property----my believe is that this may be a losing battle for you, and that Pendleton may have legally legitimate legal claims to bring against you. In a situation such as this, you should retain legal counsel to attempt to negotiate a satisfactory settlement that avoids the significant financial harm you would probably suffer if you need to litigate this dispute.