Is it fair use to use an image from a photo CD a company sent me?

This is a fair use and copyright question: A Canadian company sent a cease and desist letter to me (in Washington State, USA) for allegedly using their copyrighted image on my website, included a bill for nearly $10,000 US, and threaten a law suit if unpaid. The image used was a small size and likely taken from a photo CD that the company mailed me for free. It was my understanding that the company gave away their free images to use and entice you to buy larger versions of it or to demonstrate their quality and to buy other images. Is it legal for this company to 'bait' people into using their images, by sending them out to people free on CDs, but then they collect money on it if used on a website? Does it matter how long the photo was online? Does it strengthen/weaken my case the fact that it has been for x years and they choose to now have an issue with it? I'm also not 100% sure I got it from the free photo CD- it's possible it came from an archive at the university I attended, or possible it came from a purchased photo CD at a previous employer- do these other possibilities strengthen/weaken my case? The image was used on a website was a student project (as part of a class) which sold a product, but never really took off. The image was not essential to the website and could have been a variety of other free images substituted for it. The project never made a profit. Had I known they would have had an issue of course I would have used a different image. The image is now removed. Do you think the use of this image on the website fair use? Thanks for your input!