Can I Use Sheet Music as Part of Crafts Product?

Dear Rich: I'm about to launch an online marketplace for handmade crafts which includes customizable gifts which incorporate a customer's favorite or most inspirational song printed on aged, antiqued paper decoupaged (collaged) on to a keepsake box. I'm subscribed to a third party service and I pay for each printing of the sheet music I then age and use for the keepsake. The copyright is noted at the bottom of each page, along with an additional notation of my personal payment and my name with the date. I generally don't use the entire song sheet. I also print a second "clean" copy of the sheet music and file it in case there are ever questions about permission. Since I'm not familiar with copyright law, I'm a little nervous that this may be problematic.
The question you're wrestling with -- whether the purchase of a copyrighted item permits you to use the item as part of another product -- has come up several times in court cases. For example, a company purchased notecards and affixed them to tiles and a court ruled that was permissible under the first sale doctrine (a legal principle that guarantees you the right "to sell or otherwise dispose" of copyrighted items). Another court took the same position when a fabric manufacturer complained about the use of its copyrighted fabric in children's bedding.
On the other hand ... A federal court in  California ruled that ripping out images from a book by Patrick Nagel and reselling them on tiles was not permitted. Another California court ruled that pulling art images from a book and framing them was not permitted. And a New York court  prohibited a company from re-selling posters after making them appear like oil paintings on canvas. These cases are based on the idea that the resulting products (framed artwork and decorative tiles) are derivative works (new works that transform, adapt, or recast existing works).

Five things to consider: 

• Did you enter into a license agreement when you downloaded the sheet music? Check to see whether you clicked-to-agree to limited uses of the sheet music. A licensing agreement may trump copyright law.
• Don't make copies of sheet music. Only affix purchased copies. If the first sale doctrine shields you, it will offer protection only for authorized copies.
• The likelihood you'll get hassled is proportional to your company's profile. The bigger your company and the more expansive its marketing, the more likely a music publisher may object. The larger your sales, the more incentive there is for a lawsuit. Companies usually go after those with deep pockets especially when the caselaw is as confusing as it is for the first sale doctrine. 
• If hassled by a cease and desist letter, consult an attorney. You may want to stand your ground, at least at the letter-writing stage. (Keep in mind that scholars and others have disagreed with the reasoning of the California courts.)
• Don't ask the sheet music company for permission to affix the music to keepsakes. Digital sheet music sellers are distributors with a narrow range of rights. They don't have the power to grant you anything other sheet music. Only the song copyright owner (a music publisher) can grant you the rights.