one case that a collection of public domain Peter Rabbit stories with various juxtaposed graphics violated the Peter Rabbit trademarks. Citing the overlapping powers of trademark and copyright a federal court ruled that Peter Rabbit's lawyers could go ahead with their lawsuit.
Turf protection. There's a lot of money riding on the proposition that trademarks can protect these public domain franchises -- for example, Disney's proprietary approach to Cinderella, Pinocchio, Snow White, Little Red Riding Hood, Sleeping Beauty, and the Little Mermaid. Peter Rabbit's lawyers are internationally active and we assume the Hasbro and Simon & Schuster legal teams for Raggedy Ann (and BFF Andy) are also vigilant.
Bottom Line Dept. We don't want to discourage your use of public domain materials and we like your book ideas. We also think that there's some case law that supports your position -- for example, the Supreme Court prohibited the use of trademarks to create a "mutant" copyright regime and the high court also liberated titles of public domain works. There's simply no bright line test to determine when (or whether) fictional characters from public domain books can be used to limit public domain reproductions. For that reason, proceed with care. As a general rule the further you stray from the original public domain publication, the more likely you are to trigger a cease and desist letter. And if you plan to proceed with your projects, include prominent disclaimers stating that the works are not associated with the various trademark owners.