Good afternoon. Even though he does not have the right to use the name in any capacity because your friend already has used the name, the competitor is within its legal rights to have obtained the website and prevent you from using it. People have done this for years with odd names in hopes those names would become valuable to someone. You are being held hostage, but unfortunately he is within his rights. But, if he attempts to use it in any way, then you can file a claim against him for infringement of a protected name that was previously in use.
I hope this has given you the guidance you were seeking. I wish you the best of luck!
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The information given here is not legal advice. As all states have different intricacies in their laws, the information given is general only. This communication does not establish an attorney-client relationship with you. I hope this answer has been helpful to you.