From their FAQ: Does Newegg.com pay the return shipping cost for defective merchandise? No, Newegg.com does not pay the return shipping cost for defective merchandise. We are not responsible for product defects, because we do not manufacture the products we carry.

However I had the same experience as you when trying to return a defective mouse:

Me: I'm not going to pay return shipping. CSR: Ok, we'll send you a shipping label.

It's confusing and arbitrary.

What's worse is that you have to return it to their CA facility and wait a couple of days for them to decide to ship out a replacement, which is a two week turn around time for customers on the east coast.

Overall Newegg's level of price competitiveness and service is slipping; I see no reason to order from them unless avoiding the sales tax on that order is worth it.