You've stumbled upon one of the reason Apple is one of the only companies to use LiPo batteries in their notebooks. LiPo's are superior in nearly every way, they hold a massive charge, they last longer (more cycles) than any other type of battery, etc. etc.
BUT, when they fail, they swell. This is a property of the battery. Apple is willing to sacrifice this for better performance. Right? Wrong? Well, you DID buy it. Other companies that use LiPos put them inside thick plastic enclosures to prevent them from swelling. But that reduces the size of the battery, and thus the lifespan (a principle reason the new MBP batteries are not easily removable, Apple wanted the bare cell in the notebooks case in order to have the best possibly battery life). Again, right or wrong, no comment. But it is the compromise Apple decided to make in the design. Me personally? I'll take it. I'll replace the battery when it's time for the same reason I'm willing to take the downsides of the LiPo/Case-less battery... I want to be able to use my computer for several hours without being plugged in.
Personally, I suppose they should have made sure the trackpad was working under Apple Care. However, this IS normal behavior for a dying LiPo battery, and is not 'defective'
It's unfortunate they were rude. Usually they are pretty good to me, but occasionally I get a snarky comment from them.
Hope it all works out for you, but, no, a swelling LiPo is not unexpected.
http://www.apple.com/batteries/notebooks.html
"The built-in battery of your MacBook Pro or MacBook Air is designed to deliver up to 1000 full charge and discharge cycles before it reaches 80 percent of its original capacity. In addition, Adaptive Charging reduces the wear and tear on the battery giving it a lifespan of up to 5 years."
So exactly where has the OP used up his battery? The above doesn't say that the battery will be dead at 1000 cycles and make the laptop unusable even before reaching that number. I'm with the OP here, I think the battery is within normal use margins and should be considered defective since it's dying prematurely.
Again, it's a characteristic of a LiPo battery. Older Li-Ion batteries gradually lost charge over time until they were done for. LiPo batteries lose only a small chunk of their charge (20% in this case) over their lifespan, and that lifespan is much much longer. However, once they hit the end, it's over. So, yes, a LiPo will go from 80% charge, to 0 just like that. Contrastly, when the LiPo is approaching 80%, a Li-Ion battery is already gone. Occasionally you'll hear people describe LiPo cells as "They either work or they don't", and that's basically true. There is SOME loss of charge over time, but ultimately, not very much. They tend to hold most of their charge for most of their life, and then just fail all at once. It's just a characteristic of how they work.
We use them in R/C planes all the time. I fly mostly gas but I have a few small electrics that run LiPo cells. We test them frequently because once they hit 80~85% of their capacity, chances are, they are going to suddenly fail (like, run for 45 seconds then die, as opposed to 15 minutes the flight before). However, compared to previous battery technologies, they last much much longer, hold more of a charge, and don't have a memory effect (they can be charged or discharged from any point). So it's definitely a preferred technology by far, you just have to realize that it doesn't work like the older batteries you're used to.