A few people disagree on the answer to that. But most agree that if the patch is for your own personal use (rather than commercial) then it's fine.
Basically, patches include modifications to the game to improve it, made by fans of the game. Stuff like edited kits with sponsors, edited ball, edited advertising boards, edited goal nets, edit stadium banners, edit crowd noises, edited music and edit screens. And more edited stuff. It's up to the individual whether or not they want to use them.
To play a patched version of a game, you need to have a chipped or modded PS2. Check the Editing section for more info on methods to play WE7 and you can find out all about the various methods (the thread is based on how to play WE7 but applies to other games too).