I don't know about the legality of it, but I know that if you sell anything that is ingested (eaten) you DO have to jump through a lot more hoops. I'E. a commercial kitchen for creation, lists of ingredients, etc. It sounds like this guy wasn't a very good seller or he would have been watching his booth like a hawk. You will always lose a customer if someone sidles up to your booth and there's no one there to talk to. They just move on. Hopefully they moved across the aisle to your booth. I wouldn't worry too much about this fellow, because he clearly doesn't care much. And if his packaging wasn't very pretty anyway, I'm sure he didn't sell much. Packaging doesn't sell a product, but given a choice.....
You'll see all kinds of vendors at craft shows, some good and some bad. Evidently you were paired with a pretty bad one. Just hope you don't have to be next to him again in the future, and when you are, feel comfort in the fact that he's not a very good seller. Or obviously doesn't have a passion for his product.