Yep. The password can't encrypt the diagram. The whole point is that the diagram is still readable so that it can be recompiled. If you want security, you have to save your VIs without diagrams and give up the ability to recompile for different platforms and different LV versions.You're just lucky no one has build an equivalent of Reflector for LabVIEW. It can regenerate C# source code from the binary compiled DLLs or EXEs, even without the debug info being included.
In the modern world, you have three choices:
don't share your code in the first place
only give it to users who aren't dedicated to getting into your code or for whom it is cheaper to buy it than to crack it
get a lawyer to enforce your copyright and terms of use. Small claims court is your friend here.
Those are your options.
Let's just say his next PXI chasis will be "calibrated differently" and leave it at that.