Google and Yahoo! will usually investigate click fraud claims, if you can point to a specific instance. If you aren't sure how they are taking advantage of you, though, you won't have anything to report.

Also, both have systems in place to watch for a single IP address that keeps hitting a link over and over again. We have received refunds from Google for instances where they informed us we were the victims of click fraud. So it does happen, but it most likely can't happen often enough to effect your budget long term.

When you do get a lot of traffic for a keyword but no conversions, though, consider your ad text and your landing page. Try running your ad groups with several versions of Titles and text, then narrowing them down to the one that converts the most.

As for your landing page, make sure it is all about converting your customer – don't send them to your main page, or even a product page. Create a single page that describes your product and has a strong call-to-action. Be sure not to put any links on the page, other than the one that sends them to the form you want them to fill out or the product you want them to buy. If you ad was good enough to bring them in, and your landing page copy is compelling enough to create a sale, they shouldn't want to go somewhere else.

I hope that helps – good luck!
References :
http://www.mightyinteractive.com/blog.php/

There is probably no way you can catch your competitor. But you can advertise in places where your competitor will not find you, like making a direct deal with a company to display banners on their website. It will take your competitor excessive time to find your marketing area. And they probably wont.
To avoid fraudulent clicks in PPC ads, try to describe your product thoroughly, not necessarily targeting everyone.
References :