i agree, i would have, or my mom would have, smacked that lady!
i dont think you aren't being overprotected. just think if you saw a man running at you with a gun, if SURE you would pick up your baby or kid. if you want to build his confidence, try arranging a playdate with a local dog in your neighborhood or with a friend or something. is there a dog park near you, if so see if there is a section for smaller breeds. glad your furbaby is alright!