I had this same issue several months ago. I finally figured out (somehow.. I can't remember where I found it), that there is a security feature built into the chip reader that only allows it to be paired with 1 device at a time. I had previously paired it with an iPad and was trying to pair it with a new iPhone and was getting the error mentioned in this. When I went and unpaired it with the original iPad, I was then able to pair it with a new device. Hope this helps.