Exactly - sites like eLance make you compete with people who will do a 100 hour project for $100.
There's a new freelance exchange on the 'net, http://www.BostonFreelance.com. Although it's free to sign up for projects, they have a very strict admissions policy. In order to qualify, you have to submit examples of your work -- and even still they reject more than 50% of the people who apply.
It just started recently, you should check it out.
I use freelanceworkexchange.com and get a bite once in a while. The good news is the listings are light so the time spent looking for work is minimal. I have not had to do any bottom feeding, but maybe that's why I get only occasional work, enough to make it worthwhile so far. The other sites I've seen, yes, run for your life.
"Far better is it to dare mighty things, to win glorious triumphs, even though checkered by failure, than to rank with those poor spirits who neither enjoy much nor suffer much, because they live in the gray twilight that knows not victory nor defeat."
-- Theodore Roosevelt
I'm not an attorney, but based solely on what you've written, he most definitely does not own the rights just because he's used your work and not paid you. I mean, that's one of the stupidest arguments...