The U.S. government sued AT&T Inc (NYSE:) on Tuesday, alleging the No. 2 U.S. wireless carrier sold consumers unlimited data plans but would reduce their Internet speeds once they exceeded a certain amount of data.
The Federal Trade Commission said this throttling of Internet feeds was deceptive and that in some cases data speeds were slowed by nearly 90 percent.
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FTC Chairwoman Edith Ramirez said that AT&T wanted to retain longtime customers and so allowed them to buy unlimited data plans, in some cases after new customers were no longer offered unlimited plans. Then they unilaterally changed the terms, she said.
"They stopped providing the service that customers understood they had purchased when they entered into their contract," she said. "Customers would be subject to an early termination fee if they wanted to get out of their existing contract."
AT&T called the allegations "baseless" and said the practice was needed to manage network resources.
"We have been completely transparent with customers since the very beginning," said Wayne Watts, AT&T's general counsel. "This program has affected only about 3 percent of our customers, and before any customer is affected, they are also notified by text message."
More than 3.5 million customers with legacy unlimited data plans had their Internet speeds slowed more than 25 million times by AT&T's practice, which began in October 2011, the FTC said.
AT&T says on its support website that people with certain plans can experience data slowdowns once they exceed certain limits. Customers with a 3G smartphone will experience slowdowns after using 3 gigabytes of data in a month, while those with 4G LTE smartphones can use 5 gigabytes before potential slowdowns.
Those who dislike the throttling can use Wi-Fi or switch to a different plan, AT&T says on its website.
AT&T closed up 0.6 percent at $34.33 per share.
Federal Communications Commission Chairman Tom Wheeler has said that his agency was troubled that some carriers singled out specific customers for throttling.
The FCC is reviewing wireless carriers' data management practices after Verizon <VZ.N> in July announced that the top 5 percent of high-speed data users on its older unlimited data plans might experience slower speeds.
Verizon, the largest U.S. wireless provider, ultimately scrapped the plan for the higher-speed 4G network, though the policy is in effect for unlimited subscribers on the 3G network.
Sprint <S.N> and T-Mobile US <TMUS.N> continue to offer unlimited data plans.
Earlier this month AT&T said it would pay $105 million to settle FTC allegations that it put unauthorized changes on customers' mobile phone bills.
Separately, the Justice Department is currently reviewing AT&T's proposed purchase of DirecTV <DTV.O>.
The case in the U.S. District Court for the Northern District of California is FTC v. AT&T Mobility, LLC.
(Reporting by Diane Bartz; Editing by Ros Krasny, Alan Crosby and Phil Berlowitz)