Malcolm Dodds, of the Dunedin Santa Parade Trust, has been told to destroy the Spongebob Squarepants crafted locally for the parade, because it infringes copyright.
The costume was built for last year's parade after it became difficult to acquire a costume from Auckland, Mr Dodds said.
"We built a trailer ready for Spongebob to be on, spent a lot of money, and couldn't get the use of the costume, so we decided to build our own Spongebob and save about $4000 a year.
"That's a lot of money for a cash-strapped charitable trust."
The trust raised over $3000 to have the costume made.
Members had given some thought to licences, but believed that as there was no financial profit to be made, they would be fine.
However, in early February Mr Dodds received a letter from lawyers for copyright holder Viacom telling him to stop using the costume and destroy it.
Last week, he received a follow-up call from the lawyers asking if the costume had been destroyed.
"It's just miserable. I mean where is their Christmas spirit?
"If it is a business thing, well actually we are giving Spongebob free advertising in front of tens of thousands of kids in Dunedin and Invercargill."
But at least one expert said the copyright holder had every right to order its destruction.
Under the Copyright Act, the creator of any artistic work had the ultimate right to determine who reproduced that work, intellectual property barrister David Marriot told TV3.
If they wanted to, they could say nobody could use it at all.
"That applies to any situation if anyone were to make any kind of copyrighted character into a costume and attend a costume party, they would be breaching copyright laws."
Mr Dodds said Spongebob was one of the most popular floats in the parade.
He was still hopeful Viacom would change its mind, despite being aware that by not destroying the costume he was risking prosecution.
"We've had other sponsors; Barbie, with Mattel. We've had Snow White and the Seven Dwarves. If all of them wanted to do this we wouldn't have a santa parade."
