Right to take photos in public spaces

Yesterday, while at the Ann Arbor Art Fair, I took a photo of an artist sitting in his booth reading the local newspaper. I took it, as it happens, with a Treo 600, which of course is not a hi-res device.  An assistant to the artist rushed out and accosted me. She told me that photographs of the artists' work are not allowed. I explained I was taking a shot of the artist, not the art, on a low-res device. She backed off.  Later, talking to an artist who makes jewelry, I learned that there are people who take photos of art and send them overseas to have knockoffs made. She said in particular there are shops in Korea that knock-off art at American fairs, and then sell it in bulk to stores such as Target and Pier One.
 I discussed this with a photographer with a 50 year old Rollei camera. He had not been hassled; you hold that camera at waist length and look at the viewfinder from above.
 I am curious about two things:

1. What is the law? Can someone prevent me from taking a photo of a scene on a city street?
2. What is the etiquette? Realistically, to get a close enough photo of a piece of art to knock it off, one would need to be very close to it, generally. And it seems to me that if someone really wanted to knock off something, they'd just buy it. Most items worth knocking off for the mass market don't cost all that much. /rich