Click Fraud is an Industry, so play safe
Clicks on Competitors' ads with malicious intent to exhaust their budget, are termed Fraudulent clicks or Invalid Clicks in PPC. Some advertisers consider, spend on PPC should be both way, so they also pay for clicking on competitors' ads. Google has a system for detecting such clicks. However advertisers feel it is not 100% accurate and can catch only some clicks by amateurs in this field. On many occasions they find clear cut indication in stats that they have been charged for clicks by competitors. Masters of Click Fraud Industry have evolved many innovative techniques to escape Google's auto-detection system, like 3 refresh after every click & using automated software which automatically clicks on ads changing/spoofing IP. Some are also using different IPs for search and click to evade blacklisting. Google's TOS clearly states, clicking on competitors' ads will disqualify them from Google's adwords program. However, till we find people prosecuted by court of law for such activities, playing safe is a better strategy.
Make best use of Geographical Setting
If you suspect people of some nationality or location would be maliciously clicking on your ad, you must use the targeting exclusion tool.
Change the default setting to only Target People physically present in the targeted location, and exclude either those physically in excluded region, or use the second option of excluding both who are physically present in excluded region and those who are interested in excluded region. The second option would exclude even people of those nationalities who are present in the targeted region. For example, if you are targeting USA and suspect Your competitors in India are maliciously clicking on your ad. You should exclude India, and set exclusion setting to exclude people physically present in the excluded region, and also those who visit pages related to the excluded region. This brings great result in most of the cases. People won't be able to access your ad either sitting in India, or most likely even in USA, if they visit India related pages on the same computer.
Use Location based bidding
Advertisers should avoid common bidding in entire targeted region. Use low bid for the whole region and increase the bid for specific locations within the targeted location. This way one can minimize the loss through fraudulent clicks incurred. For example, set the bid for whole of USA, $2 and increase the bid of city and states by 30%, 40%....
Use IP Exclusion feature
Directly exclude IP Addresses by entering IP Data from where suspicious activities emerge into IP Exclusion in Settings. If you don't have access to weblogs of your website you can easily create such a log by inserting a piece of code into your website. Statcounter.com generates excellent stats of IP and session. You can use its free service. There are some software like Clickbrainiacs available in the market, which can do this automatically and with more accuracy in real time. If you have big budget, you must try and buy them.
Stay away from some obvious...
In the worst case, you may avoid exposure on terms where your competitor would obviously assume your presence. Simply add some Exact negatives, in negative keyword list. It is a technique which works wonderfully.
Change the Domain Name
If you are in a highly competitive industry, prone to click fraud. It is better to shift some keywords, identified in the above step and set up a new campaign with new domain. Are you still surprised why you find some industry leader missing on some great keywords.