When a trademark is infringed you contact google and if you can back up your obejction with proof then google cancel the adverts/adwords using the Trademarked name, I have done this before and they are friendly enough.
They don't do this anymore, sji2671. But I don't know the details of Jon's problem. You might want to try this: http://www.google.com/tm_complaint.html#1
There is a recent case where a company sent a Cease & Desist letter to Google. Google failed to act in time so they took out a lawsuit against Google. Would Google then sue the advertiser concerned?
Surely Google cover themselves in all sorts of ways against legal action like this, key term is probably that they make a "reasonable attempt" [to remove the ad] which given the volume handled by google they would prob be given a long period