I have just done this quest. Before we met him I used one charge of the Dog Skull's PoE magic, and yet Darkskull successfully cast fear on me. I looked at the combat logs and I didn't see that PoE was dispelled.
So either that npc is not evil, either Dog Skull is bugged, or Fear spells are not considered mind-affecting and I missed that fact??
Did you fail the saving throw roll? PfE does not make you immune anymore.
Fear
Spell level: bard 3; sorcerer/wizard 4
Innate level: 3
School: necromancy
Descriptor: fear
Components: verbal, somatic
Range: medium (20 meters)
Area of effect: large (5 meter radius)
Duration: 1 round / level
Save: will negates
Spell resistance: yes
Additional counterspells: remove fear
Description: Affected creatures are consumed with mind-numbing fear that overrides all other actions. The affected creatures run away from all those they do not consider allies.
Ah, that explains it then. Didn't know PfoE wasn't effective against fear anymore, thanks.