I recall that the Legends of the West sheet was reprinted with the error and the resulting sheets were sold by a lottery system to collectors. (right???)
Correct. And in that case, they did not "flood the market" with the error, but rather they sold a limited number by lottery, so a lot of collectors who wanted them still missed out. Today, they still command a sizable premium over the non-error variety.
It's a bit of a different situation for the Dag Hammarskjold issue, though. In that case, the error was issued in such quantities readily available to anyone, so as to devalue any philatelic premium placed on it.
Actually, now that I think about it, perhaps the circumstances surrounding the Legends of the West error was decided upon based on the lessons (or legal findings) learned by the earlier Dag Hammarskjold error.