The following quotes are from the email sent by Matthew W. Carlin, of Gibney, Anthony & Flaherty, LLP (New York City). We have added emphasis (bold lettering) to high-light the points that are false.

"The fabric used to make your items contain trademarked images of the Bob the Builder and Thomas the Tank Engine characters."

True.

"Your use of this fabric to create unauthorized and unlicensed merchandise constitutes trademark infringement and unfair competition in violation of federal and state laws."

False. The word "unauthorized" in the Lanham Act refers to counterfeiting either the trademark itself or putting a mark on an item to deceive the public into believing it is a trademarked product. Using material the was manufactured by the trademark holder does not constitute counterfeiting.

No one is making "unlicensed" merchandise since the material being used was licensed by the trademark holder. Matt, read the Precious Moments Case, or, since there are no pictures, have someone in your office read it to you, s-l-o-w-l-y.

"Your products are likely to cause confusion in the marketplace regarding the source of these goods,...."

That doesn't matter. Fair use allows someone to accurately describe the aspects of their item if it includes the trademark of another. And, in KP Permanent Make-Up, Inc. v. Lasting Impression I, Inc., No. 03-409 (December 8, 2004), the Supreme Court stated, "that a defendant could establish the fair use defense even if some consumer confusion was probable."

"Your listing of these sales as “home-made” (or similar disclaimer) does not change this fact."

Wrong again. Court after court (see Charles At The Ritz Group, see Precious Moments, see HBO) have required prominent disclaimers as a means to dispel potential confusion.