Voided Warranty - "Rusty Screw"

I will try to avoid any bad puns here but the Apple Store just pulled one over on my wife and I am ******. Phone started acting up a few days ago and she made an appointment with the local Store. The phone was still in warranty, had not been in contact with water, and the water damage indicator light was good.

She brought it in and the first person looked at it and opened it up and said everything looks fine, no water damage, etc. She goes in the back and a second person comes out with a picture of a rusty screw that she claims was somewhere inside the phone. And says this voids our warranty. So the phone never touches water, the water damage indicator is clean, and someone comes out from behind the magic Apple curtain with a picture of a rusty screw - not even the actual rusty screw mind you - and says we're out of luck.

How do they think they can get away with this? The warranty is useless if they can just say whatever they want as "proof" of non-existent water damage. Even if the screw was rusty - which I doubt - who's to say the screw wasn't rusty or exposed to water during manufacturing.

What are my options here? If they don't make this right, the family is done with Apple after 10 iphones and a Mac.