wheel - 9:31 pm on Aug 8, 2011 (gmt 0)
Just to clarify, they are advertising when someone searches on your URL, NOT using your URL in their search. So if I search for webmasterwworld, they see an ad for wheel's-wonderful-seo-strategy. that's fair enough and common practice in PPC, advertise your products in front of people looking at your competitor's product.
It's an entirely different story if they were representing themselves as your url - but that's not what you'd indicated was happening.
the only other route I can suggest other than 'business sucks' is perhaps your industry has some recourse. I know if I sent this practice to the regulators in my industry they'd have this competitor for breakfast. They freak out at the stupidest stuff, any sniff of misrepresentation, real or not, would give them seizures.