A "Smart Card" is a computer chip contained on a circuit board. The smart card is typically used instead of a memory card in a device where the memory needs to be protected. Security information enabling access is programmed into the smart card.
A "Smart Card Reader" is an interface which permits a device (such as a satellite television unit) to talk to the smart card. There are a wide variety of smart card readers, most of which can also write to the smart card. Within the context of a satellite television unit, a "smart card reader" built into the unit permits an individual to watch programming authorized by the "smart card".
Absolutely not. Smart cards are used in a great many industries, including satellite cable. Every subscriber to a service such as the Dish Network (Echostar) or DirecTV will normally receive a smart card encoded with their subscription information - and it is legal, expected, and necessary to possess and use that smart cart to watch the satellite service. It is only where the smart card technology is used improperly, such as the use of a smart card which has been reprogrammed to allow the user to watch unlimited television programming without payment, that the use is illegal.
In recent decades, the satellite television industry has been quite aggressive in litigating against companies and individuals who sell smart cards encoded to descramble their television broadcasts. As a result, they have also acquired many customer lists, which include the names and addresses of their customers. Some companies, particularly DirecTV, have been reported to have aggressively pursued people on those customer lists, sending demand letters accusing them of "illegal signal theft equipment" or "pirate access devices", demanding payment and threatening litigation. Many innocent people have received this type of letter.
Additionally, some companies (again, most notably DirecTV) have filed lawsuits against individuals who they believe they can demonstrate to have engaged in theft of services. After accusations that the suits were overbroad, following lawsuits against people who legally possessed smart cards but could not be shown to have misused them, the companies now generally file suit only where they have some evidence of illegal use.
The consequences for being using an illegally reprogrammed smart card depend upon the amount of evidence possessed by the police or satellite television company. Even where the satellite television company has records showing that suspect equipment was purchased by somebody at a particular address, that may not be enough to act against the resident of that house. As smart card technology has many legal purposes, the mere possession of cards or readers is probably not enough to interest the police. While the satellite company can file a civil lawsuit for "theft of service", after recent court rulings they will likely not file a lawsuit unless they believe that they can demonstrate that the smart card technology was used illegally.
If a satellite television company files a lawsuit, under U.S. federal law it will ask for damages in the amount of lost subscription revenue (usually a high estimate based upon what could have been watched through use of the unauthorized smart card, as opposed to what was actually watched), and if victorious may also receive statutory damages of up to $10,000.00 per violation and an award of attorney fees and court costs. The attorney fee award may well be much larger than the amount found owing for unpaid satellite television fees.
Damages may be significantly greater if the defendant is shown to have engaged in the manufacture, distribution, or modification of smart cards.