The Federal Trade Commission has sued AT&T (NYSE:T), alleging that the company has misled millions of its smartphone customers by charging them for "unlimited" data plans while reducing their data speeds, in some cases by nearly 90%. The FTC alleges that by "throttling" users after they have used a certain amount of data, the company is not actually providing the unlimited service it advertised.

The FTC's  complaint says that the company failed to tell its customers on unlimited data plans that if they reach a certain amount of data use in a given billing cycle, AT&T reduces their data speeds to the point that many common mobile phone applications -- including web browsing, GPS navigation, and streaming video -- become difficult to use, the federal commission wrote in a press release detailing the suit.

"AT&T promised its customers 'unlimited' data, and in many instances, it has failed to deliver on that promise," said FTC Chairwoman Edith Ramirez in the press release. "The issue here is simple: 'unlimited' means unlimited."

How AT&T responded
AT&T disputes the charges and released a statement that expressed surprise and outrage at the allegation:

The FTC's allegations are baseless and have nothing to do with the substance of our network management program. It's baffling as to why the FTC would choose to take this action against a company that, like all major wireless providers, manages its network resources to provide the best possible service to all customers, and does it in a way that is fully transparent and consistent with the law and our contracts.

Figuring out exactly what AT&T communicated to its customers when it sold the unlimited plans is a challenge because the company no longer offers an unlimited plan. Instead, the only people who have unlimited data are those with grandfathered plans, and AT&T said in its statement that it has adequately communicated its throttling.

We have been completely transparent with customers since the very beginning. We informed all unlimited data-plan customers via bill notices and a national press release [in 2011] that resulted in nearly 2,000 news stories, well before the program was implemented.  In addition, this program has affected only about 3% of our customers, and before any customer is affected, they are also notified by text message.

That is true, but AT&T would look better if it had not changed the terms of its unlimited deal -- a program it despises so much it has discontinued it -- after customers were already on board. AT&T clearly wants its subscribers to drop unlimited plans in favor of ones with hard data caps, and throttling is a way to make "unlimited" much less appealing. Basically, it's saying that you can have all the lobster you want to eat, but after the first one, you can only pick up more, one at a time, at midnight in a bad neighborhood. That's still "all you can eat," but not really true to the spirit of the offer.

What the FTC is alleging
The FTC complaint makes a number of allegations against AT&T, including:

  • AT&T's marketing materials emphasized the "unlimited" amount of data that would be available to people who signed up for its unlimited plans and failed to inform them of the throttling program even when the plan was renewed. If those customers then canceled their contracts after discovering the throttling, AT&T charged them termination fees, which typically amount to hundreds of dollars.
  • AT&T, despite its unequivocal promises of unlimited data, began throttling data speeds in 2011 for its unlimited data plan customers after they used as little as 2 gigabytes of data in a billing period. The throttling program has been severe, often resulting in speed reductions of 80% to 90% for affected users. 
  • AT&T has throttled at least 3.5 million unique customers a total of more than 25 million times.
  • Consumers in AT&T focus groups strongly objected to the idea of a throttling program and felt "unlimited should mean unlimited." AT&T documents also showed that the company received thousands of complaints about the slow data speeds under the throttling program. Some consumers quoted the definition of the word "unlimited," while others called AT&T's throttling program a "bait and switch."

In an interesting note, while AT&T says it has adequately promoted and publicized the throttling, one of the co-founders and editors of GeekWire, a leading website that covers the wireless business along with technology, was not aware when the cap was initiated. He wrote about how he found out, about three years after the caps were initiated here.

The broader impact
Overall the FTC is seeking to create a clear, legal definition for the word "unlimited." AT&T may be the target in this case, but Sprint (NYSE:S) and Verizon (NYSE:VZ) each throttles in its own way, while T-Mobile (NASDAQ:TMUS) throttles, but is very up-front about it and it does not throttle unlimited users.

AT&T may be guilty of following industry standard practices, but that standard has clearly been to promote words like "unlimited" while leaving their meaning open for interpretation. It's probably not fair for the FTC to solely hold AT&T accountable for something which has been common in the wireless business. 

Still, the FTC needs to use the courts to establish a precedent for how information is delivered to customers, and what to do when a company is lying, even if it's a lie of omission rather than a direct untruth. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.