Good evening. He is either entitled, as you have offered, to either return the puppy for a refund or keep the puppy with no refund. He doesn't get to select both. Let him sue you. He will have no chance in prevailing. Let him know, however, that you plan on taking the offensive by filing a defamation claim against him. Thanks to his overexuberance in spreading all these rumors about you, you have pretty good proof of his defamatory actions. To prevail in a defamation suit for libel or slander and recover damages, you must prove 4 things: (i) the defendant conveyed a defamatory message they knew or should have known to be false; (ii) the material was published (i.e., conveyed to someone other than you); (iii) you can be identified as the the person referred to in the defamatory material; and (iv) you suffered an injury to your reputation as a result of the communication.
I hope this has given you the guidance you were seeking. I wish you the best of luck!
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The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.