I have sent in 2 bags, I think that they determine what they will do depending on the nature of the damage, the age of the bag and availablility.
One bag was only used for one season, but was a over a year old. The it was a signature carryall tote. The suede on the bottom wore off of the piping and I think
Coach stopped doing this because they didn't wear well. They couldn't repair it, but since it was a common defect, they kept the bag, did not repair it and gave me a full purchase price credit.
The other time, it was a factory defect on my Holiday Patchwork Duffle (the new one is in transit right now), the gold prematurely rubbed off of one of the patches and they aren't fixing it, they still have them in stock and are sending me a new one.
I have heard from people about partial credits also, but have not experienced it. I have heard that they will clean bags through the boutique (I can't verify this), but I know that they will not clean bags sent in.
They always charge the $20 fee, but both times I sent in a bag, I pointed out that they were from defects and they sent me a $20 refund check.
I have also heard that Coach has the best customer service policy of most handbag companies. Dooney and Bourke will take bad bags back, but will only offer a partial credit.