Okay. Wow. Give me a minute.
So you saw a dog that A) you didn't know, B) your dog was not familiar with, C) you were not familiar with, and D) WAS OFF ITS LEASH and you decide to APPROACH it? That was your first mistake there. There is no defensible reason for you to ever put yourself or your dog in potential harm by approaching a dog that you DO NOT KNOW, no matter how "friendly" looking it is.
This entire situation of yours could have been solved by recognizing that the dog was both unfamiliar, off-leash, and from the sounds of your story, not under direct control by any other person. And even if it was under the control of another person, you should always ASK first before using their dog as a socialization exercise.
Furthermore, your puppy did exactly what I would expect any young puppy in a relatively new environment to do. It finds itself in an encounter faced with what seems to be an aggressive display from an older dog. To avoid severe bodily harm, he showed appeasement behavior (rolling over, putting himself lower than the other dog) to try to defuse the other dog's aggression and avoid injury or attack.
Finally, while the baton is a decent measure of defense if the dog decides to attack you, walking forward into a dog that is starting to back down is only putting further tension on that dog and encouraging it to pop back and bite the bejeezus out of you. Honestly, I feel like you had a huge stroke of dumb luck that the dalmation didn't take your steps forward to "show it who's boss" as a further challenge or aggressive movement. Or at least not enough of one to bite you like he was probably going to do otherwise.
As far as protection instinct in Shepherds, there are others who are more experienced in this than I am. My last shepherd had epilepsy, and my current is my first schutzhund bloodline shepherd and he has not matured yet. If they are in any way similar to rottweilers in terms of protection it is something that MAY develop in maturity, but not by putting the dog in situations where it feels like it has no control.
PLEASE manage your dog's situation more carefully. Especially if it is new to you, you are still building a relationship with your dog and you don't want to teach it that you can't keep it safe. Interactions with other dogs should be CONTROLLED at BOTH ends of the interaction, especially with dogs that you do not know.