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Question:  Ayn Rand said, "The only action which a government can take to protect free competition is: Laissez-faire! which, in translation, means: Hands off." But how is illegitimate economic power deriving from false value contained without government interaction? And how, then, is the government to protect man's rights (i.e., how can Rand justify copyright laws when thay are hands-on)?

Answer:  Ayn Rand maintained the necessity of a government that kept its “hands off” the private lives of its citizens, while at the same time protecting their individual rights. This means ensuring that the same inalienable rights are granted to all citizens equally. Illegitimate economic gains such as fraud are violations of the individual rights of others and must be dealt with in a court of law. The government is the only entity that can be justified in the use of physical force, as may be the outcome of judicial proceedings. (Ayn Rand deals with this in detail in her book The Virtue of Selfishness in the chapter “The Nature of Government.”)

Another type of illegitimate economic gain is the sale of poor quality products, where it is not possible for the buyers to detect the intentional lowering of standards. In a laissez faire economy, this type of fraud would be countered by competition and innovations that provide a safeguard against such activities. Additionally, note that in the long run, consumer choices are a reflection of what consumers call for. Consumers therefore have at least some responsibility in determining the products in the market, to the extent that is reasonably possible.
Copyright laws are in place to protect the intellectual property rights of creators. A creator is the moral owner of his work and deserves complete control over the use of his work by others. Intellectual property is no different from material property and deserves the same treatment in a system that recognizes property rights. (You may also wish to see “Copyrights and Patents” in Ayn Rand ’s book Capitalism: The Unknown Ideal ).

Please also consider William R Thomas’s Q&A on the Objectivist View of Law and Government and his introduction to Ayn Rand ’s political thought: " Radical for Capitalism ."