The decision was important mainly for the court's determination in the penalty phase of the trial that Paramount used "unconscionable" means of determining how much to pay authors. Paramount claimed, and provided accounting evidence to support the claim, that despite the movie's US$350 million in revenues, it had earned no net profit, according to the definition of "net profit" in Buchwald's contract, and hence Buchwald was owed nothing: a classic example of Hollywood accounting. The court agreed with Buchwald's argument that this was "unconscionable", and therefore invalid. Fearing a loss if it appealed, and the subsequent implications of the unconscionability decision across all its other contracts, Paramount settled for undisclosed terms. The case was the subject of a 1992 book, Fatal Subtraction: The Inside Story of Buchwald v. Paramount by Pierce O'Donnell, the lawyer who represented Buchwald, and Los Angeles Times reporter Dennis McDougal.
In 1982, Buchwald wrote a screen treatment that was pitched to Jeffrey Katzenberg of Paramount, with the intention of starring Eddie Murphy, who was under contract to Paramount at the time. Paramount optioned the treatment in early 1983 and commissioned several unsuccessful scripts from several screenwriters. John Landis was considered as the director from time to time. After two years of development hell, Paramount decided to abandon the project in March 1985.
In May 1986, Paramount's rival Warner Bros. optioned Buchwald's treatment.
In the summer of 1987, Paramount began to develop a movie that was credited as being based on a story by Eddie Murphy, and which was to be directed by John Landis. The story outline seemed similar to Buchwald's story idea, and to the failed Paramount scripts that had been based on it.
In January 1988, Warner Bros. cancelled their version of Buchwald's project, citing the Paramount project.
When the movie Coming to America was released by Paramount in 1988, Eddie Murphy was given story credit. Buchwald was not paid, or credited as the story writer. Buchwald sued Paramount for breach of contract, as his contract with Paramount stated that he would be paid a certain amount if his treatment were made into a film.
(The court went out of its way to avoid criticizing Murphy, who, it said in its holding, was a "creative genius" just as Buchwald was, and the fault in the whole matter lay with Paramount.)
In the second phase of the trial in which the court determined the appropriate amount of damages to be paid to Buchwald, Paramount testified that despite the movie's US$350 million in ticket sales, it had spent so much money on the movie's development and marketing that, according to the formula specified in Buchwald's contract, Paramount had made "no net profit". The court then found that the formula was "unconscionable" and that Buchwald therefore could pursue a separate tort lawsuit against the company.
Fearing a loss on appeal and, presumably, a wave of lawsuits by authors claiming they, too, had been wronged by the unconscionable net profit formula, Paramount settled with Buchwald for an undisclosed amount of money. As part of the settlement, the "unconscionability" decision was vacated.
Hollywood accounting has long been derided as a cynical attempt by movie studios to cheat individual authors out of royalty payments. The accounting formulas used by the studios have allegedly been designed specifically to ensure that it is almost mathematically impossible for any movie to show a net profit. Specifically, the net profit formula in authors' contracts does not correspond to the net profit formula of generally accepted accounting principles that the movie studios use when creating their financial statements that are reported to the U.S. Securities and Exchange Commission and to the investing public. The "unconscionable" formula in the authors' contracts effectively double-counts many costs borne by the movie studio.
Some commentators have claimed this lawsuit was a watershed that would affect Hollywood's payments to anyone who enjoyed "profit participation", by forcing a change to the net profit formulas. However, another California Superior Court ruled in Batfilm Productions v. Warner Bros. in the case of the 1989 Batman movie that a similar formula was not unconscionable. To date, there has been no review of this type of claim by an appellate court, meaning that the superior courts cannot look to an appellate court's decision for guidance. The "watershed" role of this lawsuit has therefore not been demonstrated.
Still, the case has caused nearly all studios and production companies to be more careful about how they handle scripts. Concerned that "similarities" between future script drafts and movies could cause lawsuits, nearly all studios and production companies now return unsolicited scripts to their authors unopened.