You are thinking of problems with companies who produce new hardware, like Datel or Mad Catz:
http://www.destructoid.com/microsoft-su ... 9701.phtml
http://www.techflash.com/seattle/2009/1 ... kdown.html
http://www.highbeam.com/doc/1G1-132502303.html
Microsoft can protect hardware through patents, or software through copyright. If we steal or replicate Microsoft's patented hardware, we could be found to be infringing on their hardware patent. Likewise, if we steal all or any part of Microsoft's software, we could be found to be infringing on their copyrights.
Datel and MadCatz were forced to sign licensing agreements with Microsoft for their wired controllers for a very simple reason: Microsoft's console will only talk to USB devices on their approved PID/VID list (this is a list of vendors and devices that are approved for use with the console, this list is stored in your console and updated via the xbox live network). They had to sign the licensing agreement and agree to all sorts of ridiculous terms in Microsoft, in exchange for a place on their PID/VID approved list.
Wireless technology is different. Microsoft 'invented' their 'X-Tooth' technology (I made that up, but we all know that Microsoft's wireless technology is nothing more than a modified BlueTooth that's meant to lock out people from making their own wireless devices for use with the console). So if you were to create a brand new wireless device to work with the console, or emulate one of Microsoft's wireless devices, you would be sued for hardware infringement because you were stealing the patented 'X-Tooth' hardware, or in the least, the 'X-Tooth' software that is running on that hardware. It is for this reason that the only company really selling wireless gizmos for XBOX 360 other than Microsoft is Logitch, and their prices are 2-3x that of the Microsoft hardware for a simple reason: Microsoft rapes any third party company that wants to sell wireless gizmos for the XBOX 360.
Enter the mod chip... and the reason for modding. Modchips have been used for many years on a variety of game platforms to legally mitigate the ridiculous policies of some of these companies. You know why there isn't a good mod chip for PS3 controllers? Because PS3 is very lax when it comes to licensing third party accessories for their console. If you buy the hardware, you agree to abide by the software license for any software that is on that hardware. So if we were hacking the software in the controller, we could be found to be infringing. But we're not. We're modifying the hardware, and we're not stealing or replicating any patented hardware or copyrighted software in the process.
We're legal, baby!