It seems to me, this issue is pretty black and white. Many programs allow affiliates to bid on their domains or domain name keywords; many don't. If Dirty D chooses to be counted among those who forbid it, that is completely his call.
HOWEVER, if it was not a condition in the terms and the affiliate was not told about it, all legit sales until he was made aware of the fact should be paid out. I really don't see how there can be any other side to this story.
For those mentioning "spirit of the law" versus "letter of the law", that isn't relevant here; this is not an affiliate arguing he didn't see in the terms that having Filipinos commit credit card fraud all day was against the program's conditions. This is an affiliate using a popular marketing tactic that many programs DO allow, not having any reason to doubt he should be paid for it.
As for the discussion of does taking the domain name as a keyword take away type-in or organic sales from the program, my thought would be, it really depends on a lot of factors. Are you using the exact domain name, or just the exact name without the extension? If the first result for the term goes to the site's index and the PPC ad goes to a specific tour page instead and leads to sales, do you know that same person would have bought if they came to your index and not that particular tour? No, you don't. I'm sure you can come up with other situations.
Bottom line, I would allow it, but if, as a program owner, you don't wish to, just put it in your terms.
The fact it is over such a small amount of money, really lends itself this is a matter of ego more than anything else (as far as the program is concerned).