This is not an abuse of the policy. OP said phone is defective. Item does not fall under the "electronics" categories**, therefore OP should get a return.
If I was the OP I would just call Costco corporate, they will rectify the situation. The manager should not have denied this return, he is in the wrong.
**We guarantee your satisfaction on every product we sell with a full refund. The following must be returned within 90 days of purchase for a refund: televisions, projectors, computers, cameras, camcorders, iPOD / MP3 players and cellular phones.
Surprised so many people are coming out against the OP when this Costco manager is very clearly at fault.
Part of the reason you pay a membership at Costco is so that you can return an item when it breaks instead of having to go through the manufacturer warranty hassle. If that benefit is revoked then really there is little reason to purchase memberships anymore, their prices are not very good nowadays anyway.