You might want to post a thread in 'legal' and find out what you do about this- even if she is innocently doing this, it is NOT good for your business, and you were there first. I will ask DH about it later, as he is always having to sort stuff like this out.
It might just need a simple email pointing out the existence of your business, and she may back off and change names.
(You wouldn't believe how many domain names DH has registered- it's ridiculous... though of course there are many more IT products/companies than nappy ones)