Click wheel problem diagnosed as water damaged, is that right?

I bought an IPOD nano for xmas 2006, within 8 weeks the click wheel started playing up. Then a couple of weeks later it stopped altogether. I sent it back to apple as I thought it was faulty, they sent it back saying in had water contamination via one of the connector ports on the bottom. It's never been near water and had been in a metal jacket since new so how can this be? They obviously said they wouldn't repair it under warrantee too, so my question is whether anyone else has had this problem and did they get it fixed for free or is it a design flaw?
ipod nano 8GB    

I had the same problem with the centre scroll wheel button - it required a lot of force to get it to function. I took my iPod back and swapped it for another one and the button is fine on the replacement.
I'd take it/send it back if I was you.

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