“Is it normal?” is a loaded question. Of course it’s not normal! Nobody buys a yoyo thinking, “This is going to be fun until it strips in a few weeks.”
“Is this expected?” is a more appropriate but more difficult question. If the yoyo worked when you bought it, the threads were tapped accurately and it was a functional yoyo. Problems started around the time you switched bearings. The Capless bearing seat is apparently intolerant of some bearings’ shields. Haven’t experienced this with my own Capless, but I haven’t put a Trifecta in mine. [edit: Studio42 seems to have it working in his, which changes the rest of this post a bit, but I’m not up for editing it] But C3 themselves elsewhere on the forum have stated that any C bearing will work, but you may need to remove the shields.
As to “faulty,” that depends on your definition. I personally don’t think it’s great design to have such tight tolerances that you couldn’t put in an aftermarket bearing without deshielding. But be that as it may, it works with the bearing they supply. Certainly, the fault isn’t with YYE; with the exception of the goodness of their hearts, there’s no obligation for them to replace it. Nor would they be expected to even know about the alleged “bearing seat issue”, even if they were in a position to advise you about it.
When you are screwing a yoyo together, it should be fairly obvious that something is going wrong. When threads start to cross, you can tell… that’s not just yoyos, really, but anything with a threaded screw system. I’ve started cross-threading many a piece of hardware with a nut and bolt… heck, I’ve started to cross-thread lids on drinking containers! Suffice it to say, if you cross-threaded, you would probably have noticed. (though, that’s not always the case… otherwise nobody would EVER cross-thread!)
That leads me to believe that you got to the point of ‘intolerance’ with the bearing seat… and rather than saying “man, this isn’t screwing together… what gives?” you powered your way through it. A steel axle will win over an aluminum thread any day all day. So, from one perspective, there’s no external party to blame… you probably shouldn’t have tightened so hard.
But from another perspective, the temptation to tighten that hard shouldn’t have been there, in my opinion. You shouldn’t be expected to know that some bearings need to be deshielded, and C3 should include some sort of warning literature in the box if that’s the case. Again, in my opinion.
What it boils down to is this: they gave you a working product, and you found yourself in a situation using 3rd-party (after market) accessories that ended with damage to your yoyo. Whether you cross-threaded it or whether it’s a bearing seat issue, the damage was caused by the act of tightening the halves. Nobody’s under legal obligation to fix it. If YYE has a great relationship with C3, they might be able to broker a fix. If you want to contact C3 directly, they seem like a great company and may want to provide you with a solution.
All just my perspective. I would be annoyed if I were in your situation, too.