Has he fixed the engine, is it ready to be shipped back to you?
His warranty may say that the buyer is responsible for shipping, but since he paid for the shipping, he overwrite his own warranty, you aren't responsible for the costs. He put the shipping cost caveat in there to prevent people from returning the engines under his lifetime warranty. Furthermore since he paid for the return shipping, he can't charge you for storage fees. is there anything on the paper work you received when you purchased the engine about storage fees, I bet there isn't, storage fees usually apply to in shop work orders, not return warranty work. He is just trying to scare you into paying more money so he doesn't have to suffer any costs for his crappy work, or trying to establish a counter claim if you bring legal action. He wont get storage fees on a counter claim in court, not for warranty work.
Don't give in until you know how far you can get w/o paying money, once it starts to cost you you will have to decide is it worth continuing. Unfortunately it sounds like you aren't going to get anywhere w/o legal action, just don't spend more than you can recover under OR law. You might look into one of the small claims court TV shows like Judge Judy, getting your case booked there should be enough to scare him into settling. the last thing a nationwide business is going to want to do is get nationwide bad press.
Also when you post up where he sells things and on boards like this make sure to say "I think he is....because of.......", and not that "He is........because of........" One is your opinion of fact, and the other is statement of fact, you can be sued for slander for a false statement of fact, but not your opinion.
