Deborah,
When dealing with someone who is like your brother in law there are 3 possible alternatives. 1. Do nothing and ignore him. Keep doing things the way you always have, ethically and honestly and hope that he will eventually get tired of spending all of his time and energy trying to tear down your company's business as opposed to building his own. 2. Contact an attorney and show him proof of your brother in law's actions. Discuss the possibility of filing a law suit or possibly have the attorney send a letter warning your brother in law that if he doesn't cease and desist with his actions that you will file a suit.
3. Get all the proof that you have of him running his own business in competition with the company he works for. Pictures receipts, proposals, the more the better. Schedule a meeting with him and show him copies of the evidence that you have. The tell him that if he doesn't stop bad mouthing your company that you will make sure that this evidence is sent to the President or owner of his current company. If you feel intimidated by him, bring along the biggest scariest male friend that you have to the meeting. Have him just sit there and stare at your brother in law the entire meeting.
There is a fourth alternative that involves baseball bats and is what we use in New Jersey however, it can get rather messy and after all he is your brother in law.
Good luck!