The key issue in Paramount Pictures Corp. v. Puzo was whether the Copyright Act preempts the Puzo estate's counterclaim for breach of a copyright assignment agreement based on the implied covenant of good faith and fair dealing.

Under a 1969 agreement, Mario Puzo granted to Paramount all copyrights in Puzo's novel The Godfather and exclusive rights to use the work. This litigation centers on language stricken from the Agreement that, in relevant part, would have expressly granted Paramount the right to publish the The Godfather and any versions or adaptations of it. Paramount argues that this language was removed because Puzo had already published The Godfather, but that he retained no rights in the work other than to publish the original novel and other versions and formats of it. The estate argues that the effect of removing this language was to reserve in Puzo all book publishing rights in the work including, for example, sequels.

In February 2012, Paramount sued the estate in the US District Court for the Southern District of New York seeking declaratory relief and damages for copyright and trademark infringement based the estate's creation and publication of a prequel to The Godfather, titled The Family Corleone. The estate asserted counterclaims for breach of contract and tortious interference, seeking cancellation or rescission of the contract, alleging that Paramount:

Specifically, the estate claimed that Paramount breached and repudiated the agreement by:

Paramount moved to dismiss the breach of contract counterclaim on the ground that the Copyright Act preempts the claim. It also moved to dismiss the counterclaims for cancellation, rescission and tortious interference on the grounds that those claims were insufficiently pled and preempted by the Copyright Act.

In its September 26, 2012 decision, the district court denied Paramount's motion to dismiss the counterclaim for breach of contract, holding that the Copyright Act does not preempt this claim. The court granted Paramount's motions to dismiss all of the other claims.

The Copyright Act specifies that a state claim is preempted if both:

The parties agreed that the first prong (the subject matter requirement) is satisfied. However, following the US Court of Appeals for the Second Circuit's recent decision in Forest Park Pictures v. Universal Television Network, Inc., the district court found that the second prong (the general scope requirement) is not met here. The court reasoned that the contractual obligation Paramount is alleged to have breached is the implied covenant of good faith and fair dealing, which:

For a detailed analysis of Forest Park, see Legal Update, Copyright Act Does Not Preempt State Law Contract Claim for "Royal Pains": Second Circuit

This decision is notable in finding that the breach of contract counterclaim is not preempted by the Copyright Act where the claim is where the agreement lacked any express contractual provision that was breached (for example, a covenant not sue or interfere with or contest reserved rights), based solely on the implied covenant of good faith and fair dealing. Under its reasoning, copyright grantees and licensees should consider the risk of a contract claim where they seek to exclude the grantor or licensor from exercising rights that may have been reserved.

However, Paramount did not seek to dismiss the claim for any reason other than preemption, and so the court expressly declined to address the viability of the claim. Therefore, this decision also underscores the importance for a copyright owner to include agreements not to sue or interfere with reserved rights in copyright assignments and licenses, to protect the copyright owner's exercise of any rights it retains in the works at issue or may have in similar works.