Yes, I would have said to her "you really should have your little guy on a leash it is safer for him and you"...I hate the attitude that some people have about leash laws and public situations letting their dogs run free. I now nearly always say something unless of course I am at an off leash park. We had a neighbor with a very large, very gamey, seeming unsocialized dog that he would let roam free all the time....
See my post about this some time back
http://www.yorkietalk.com/forums/showthread.php?t=53248
It is a situation where people and their animals can get hurt. Not only that but having negative experiences with unleashed dogs can affect the temperment of other dogs.