Basically you've got it exactly right. There is a bitcoin private key inside the device (NOT INTENDED TO HOLD FUNDS) and a public key which is given to the users. The user then encrypts their own secret with the public key, or public key+salt and then stores the encrypted data on the chip. To get decrypt the encrypted data, they break the container open, get the private key, regenerate the public key, optionally add their salt, and decrypt the encrypted data on the chip. (Or I may have more then on chip inside where the salt could be stored, etc...)
I've put a lot of thought into it, and it seems to be one of the simplest solutions I could think of. Even if the user chooses not to salt their password, they need only to a) keep it secure and protect it (as they would any other physical object of value, like gold), b) use multisig c)store the different multisig devices separately, and they have a very secure solution within the realm of reason.
To protect the device from unauthorised scanning, you simply slip it into it's protective container (essentially a metal tube) and it can no longer be scanned, and should be even safe from EMP.
I really liked the concept until you explained the details.
The user has to supply a "secret" or "private key" if you will. They need to keep it private, yet it has to look valuable enough that it won't be thrown in the trash.
I understand that the user needs to supply their own secret to avoid trusting the manufacturer, but that also implies that the device(s) are no longer self-contained.
Well I hope I haven't lost you just yet.
There are still a few ways around this that I am experimenting with and I think it depends on what users are looking for. The lowest tech solution to this is simply writing with permanent marker on the device. Again, I can't protect users from a 3rd party that has the ability to seize all your devices (or m-of-n) devices, because if I could- that would defeat the purpose of allowing you to do things like estate planning or "you are in a coma we need your bitcoin to pay your medical bills" situation.
The market for this device is to protect you from yourself, more or less and the regular thieves that in the future will one day be after bitcoin too. The ability to which it protects you from the government depends on your ability to hide it from the government. Which is a reasonable trade off for most people. If this is a serious concern for you, and you don't mind your bitcoin going with you to the grave, there's no reason to not memorise a really exceptionally long brainwallet and leave it at that. If you want to access your bitcoin on a daily basis, and be secure, then Trezor is a better option.
This is for long term storage and planning of your bitcoin that doesn't require trusting me, the manufacturer, but also assumes that you can take care of protecting the device relatively well yourself, within reason considering whatever your situation might be. If at the very least, this eliminates the systemic threat that physical bitcoin manufactures pose. For all the people minting coins or printing plastic cards- the manufacturer has the ability to steal all the bitcoin of all the people who have ever purchased their products all at once. If I were to somehow get compromised, a 3rd party would still have to hunt down every user individually AND hunt down every m-of-n number of devices of very person AND still have to break whatever extra encryption or security strategy they may choose to employ. It's orders of magnitude more secure for the entire physical bitcoin ecosystem.
So I hope viewed through that perspective, you can keep your mind open. If you are so valuable that someone would commit themselves to hunting you down, and hunting every instance of this device that you own down, then you need to really consider some other options. If you're like many people coming into bitcoin now, investing 10K that might go to your kids college fund and you don't want to have to worry about Maleware getting it for the next 5 years, or getting married (like myself) and would like to have a joint "bitcoin savings fund" that you don't have to worry getting Goxxed, then this might just be perfect.