Hi JaBacchetta,
Matt Cutts is quite clear about follow and nofollow links in widgets - see attached YouTube movie. Why your competitor was able to do a similar kind of thing and didn't got penalised is always the question.Are you 100% sure he hasn't received a warning. Maybe your competitor states upfront very clear a link is included.
Also it is unknown when you receive a visit from a crawler. So could be your competitor was just visit before the plugin went live, and you were visit after it was just live. I would also advice to take out the follow link a use a nofollow version.
How you will recover is depending on to many factors as the algoritme changes every day / week. Good luck with it.