The U.S. government filed a lawsuit against AT&T Inc 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 that this "throttling" of Internet feeds was deceptive and that in some cases data speeds were slowed by nearly 90 percent.
AT&T called the allegations "baseless" and said the practice was needed to manage network resources.
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"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 who have 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 running into potential slowdowns.
Those who dislike the slower internet once they hit their limit are told that they can use Wi-Fi or switch to a different AT&T plan, AT&T says on its website.
AT&T shares slipped briefly on the news but rebounded to be up about 0.2 percent in afternoon trading on the New York Stock Exchange, trailing gains in the broader market.
Federal Communications Commission Chairman Tom Wheeler has said that his agency was troubled that some carriers singled out certain customers for throttling, and that subscribers who sign up for unlimited services were not getting the usage they were promised.
The FCC is reviewing the wireless carriers' data management practices after Verizon in July announced that top 5 percent of high-speed data users on its older unlimited data plans might experience slower speeds starting in October.
Verizon, the largest U.S. wireless provider, ultimately scrapped the plan for the higher-speed 4G network, though the policy is already in effect for unlimited subscribers on the 3G network.
Sprint and T-Mobile US continue to offer unlimited data plans. Verizon and AT&T have discontinued them in a bid to shift data-hungry subscribers onto tiered pricing plans that charge customers for specific amounts of data.
The case is in the U.S. District Court for the Northern District of California and is Federal Trade Commission v. AT&T Mobility, LLC.