| Like you said, his logic is flawed. If there's not a trademark issue involved here, you're in the clear. He lost all rights to the domain name when it expired. If he wants to spin his wheels and waste money on a UDRP and lawsuit, go ahead and let him.
As far as trademarks are concerned, is it obvious what the "example" term plays to Bob's business? Is it a product name? Slogan? Check uspto.gov's trademark search to see if there IS a registered trademark on the term.
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