I am sure this "rather" modifies "with my praise."
You're wrong, it modifies satisfied. It's a vague quantifier, and its vagueness argues against its use, though it is popular in some communities.
But the position of it doesn't have to be in front of "with?"
If you put it there, it is a completely different meaning of the word.
He is surprised, rather, with my praise.
In this sense, rather indicates a contradiction, that contrasts it with the previous statement. Here it is modifying the whole phrase he is satisfied with my phrase.
You could also have:
He is, rather, satisfied with my praise.
The commas make this the sense of rather that applies to the whole sentence and hence contradicts the previous sentence. Hanging on a comma like that would be a bad idea when you could rephrase, as it increases the risk of mis-reading.