I've already made a note to update my auctions in the future that I will no longer give refunds, and you keep what you buy.
It's important to indicate your terms upfront so this is good that you have that on your page now, but take out the "keep what you buy". That can be ambiguous to its meaning and may be interpreted as you are giving them the rights to ownership. You do not want to do this. I will give you more info below.
I probably could have easily contested his complaints (which he said he filed with PayPal and the auction site), but the bother is worth more time than the project and refund combined ... is it even worth it to fight it?
Well, it seems as though this guy might be doing this as a practice because he probably knows most won't persue it. What you said here:
He asked if I took PayPal (yes), and how much it would be. My total time was 3.6 hours, but I told him I was only charging him for 3 hours. 3 hours @ $25/hour came to $75.00. He paid me within 5 minutes.
Gives me this impression (that he does this to a lot of people), because he knows how many changes he had you make and he should know that is included as "time/work" involved to generate the final product. You told him 3 hours and your price, and at that time he didn't contest it but agreed to pay it. Yet now, he turns around after he already has the image in his possession and says it wasn't worth it? He already had a proofing of what he was going to receive, so that doesn't put his protests in his favor.
Anyway, like I said earlier, you should never relinquish your copyrights for ANY of your work. Unless you do a "work for hire", you, as the artist, always own copyright of the image regardless of if the work was done at someone's request.
Keep this link handy because if anyone disputes whether you own the image or they do, you can let them read the copyright laws, because as long as you DO NOT assign the ownership rights over to them, you own the image, you are merely giving them the rights to use it for whatever purpose you agree upon with them:http://www.copyright.gov/help/faq/
Whether you register the image or not, you are still protected as the owner of it, however to file a lawsuit, you must have the image registered.
Also, always keep your logs of your conversations (which it seems you have done so). Like for this particular case, he obviously agreed to pay it originally, and all of a sudden decided that it wasn't worth it. That doesn't wash well, especially because he already knew what he was getting ahead of time. You actually have a good case against him. Unfortunately, you already gave him the refund and also told him he can have the image.
It's too bad that he will continue to get away with doing this kind of thing to artists who do not know their full rights of ownership, and who do not put a stop to being treated like this.
Note: His site has copyrighted images and freebie clipart that he has modified. The work I did for him would have eliminated some of these, and I pointed that out to him, and suggested even prior to starting the project that he replace the copyrighed materials.
Is he using the copyright material on his site unlawfully (meaning, he does not have permission to use it from the owner)? If he is, then you can see his lack of integrity already right there. So, always before you do any work for anyone, check out their website and ask them questions about any copyright works they have on there. Some people are just really naive about the copyright laws, so they are not intentionally being out-of-integrity, they just don't know any better, but if anyone has a business and doing their business professionally, then they should know these things and need to get educated on it. Thus, give them the link I gave you above.
And if anyone ever tries to change your image even just a little to claim it's not the same anymore to try to get out of any copyright infringement, that whole bit about changing it 10% etc. is a myth and you'll want to have them read this:http://www.copyright.gov/help/faq/faq-fairuse.html#change
So, keep these links handy and email them to your clients if at any time your rights as the owner of the art you create for them are ever questioned.
Copyright laws are really good now with giving total protection to the artist, so you just have to make sure you don't give your rights away to anyone