Here is my analysis of the FTC’s suit against AT&T Wireless.
I. FTC Sues AT&T for Deceiving its Smartphone Customers
II. How AT&T’s Smartphone Data Throttling Works
III. AT&T’s Defense of Adequate Disclosure to Customers
IV. What Should AT&T “Unlimited Data” Smartphone Customers Do Now?
I. Federal Trade Commission Sues AT&T Mobility LLC in San Francisco Federal Court for Deceiving Its Smartphone Customers
On October 28, 2014, the Federal Trade Commission (FTC) sued AT&T Mobility LLC (AT&T), the second largest U.S. cellular carrier. (See FTC Complaint for Permanent Injunction and Other Equitable Relief.) The FTC alleges that AT&T: 1) failed to disclose to its “unlimited data” smartphone customers its practice of severely limiting their data speeds to reduce customer usage of its network beyond a preset, undisclosed data limit (“data throttling”), 2) breached its smartphone customer contracts by severely reducing “unlimited data” customer data speeds for reasons not allowed by the customer contract, and 3) collected early termination fees from “unlimited data” smartphone customers who canceled their services because of throttled data speeds, but without knowledge of AT&T’s undisclosed throttling practice.
The FTC alleges that AT&T violated the Federal Trade Commission Act by: 1) engaging in “misrepresentations or deceptive omissions of material fact amounting to deceptive acts or practices” in its advertising and promotion of its mobile “unlimited data” plans for wireless broadband internet access service for smartphones, 2) engaging in “unfair or deceptive acts or practices” by breaching its “unlimited data” smartphone customer service contracts, and 3) engaging in “unfair or deceptive acts or practices” by collecting early termination fees from its “unlimited data” smartphone customers who canceled because of slow data speeds while unaware of AT&T’s throttling practices.
The FTC requests the court to: 1) order a permanent injunction against AT&T’s smartphone throttling acts and practices, 2) require rescission or reformation of the smartphone customer contracts subject to throttling, 3) require AT&T to provide restitution to its throttled smartphone customers of monies paid by them, and 4) require disgorgement of “ill-gotten monies” obtained through its smartphone throttling practices. The amount that AT&T might be liable for has been estimated at between $300 million and $1 billion. (See Consumers wasted at least $300 million paying for AT&T’s “unlimited” data, The Washington Post, October 31, 2014.)
II. How AT&T’s Smartphone Data Throttling Works
Imagine an automobile engine and an accelerator foot pedal. When you push on the accelerator, the throttle valve that regulates the fuel and air mixture going to the engine opens to allow more mixture into the engine, resulting in more engine power and a higher engine speed.
From 2007 to 2010, AT&T advertised and promoted an “unlimited data” mobile plan for its smartphone customers. Initially the plan was optional and cost a fixed monthly rate of $20 per month. Later the plan was required for all smartphone customers and cost $30 per month. In June 2010, AT&T stopped offering “unlimited data” plans to new customers, and required them to buy a “tiered” data plan offering different monthly data limits at different prices.
Since 2010, AT&T has continued servicing existing “unlimited data” plan customers on their existing smartphones, and has offered to “grandfather” them into renewed “unlimited data” plans for $30 per month if they buy a new smartphone from AT&T.
Beginning in October 2011, after millions of its customers had chosen or renewed their “unlimited data” plans with it, “if an unlimited mobile data plan customer exceeds the limit set by [AT&T] during a billing cycle, [AT&T] substantially reduces the speed at which the customer’s device receives data for the rest of that customer’s billing cycle”. (See FTC Complaint for Permanent Injunction and Other Equitable Relief.) Typical unthrottled speeds on AT&T’s network ranged from 700 Kbps to 1.7 Mpbs for 3G customers, 2 to 6 Mpbs for HSPA+ customers, and 5 to 12 Mbps for LTE customers. Since March 2012, speeds on data-throttled devices are capped at 256 Kbps for 3G and HSPA+ customers, and 512 Kbps for LTE customers. Many customers have experienced data speed declines of up to 95%, crippling or preventing normal applications like web browsing.
The data throttling is applied regardless of the capability of AT&T’s network to serve the affected customers. Once a pre-set data limit is reached, the data throttling continues until the end of the customer’s billing cycle. Data is then uncapped at the start of the next billing cycle. 3.5 million AT&T customers have been affected by the data throttling practice. These customers have had their download speeds capped, on average, for the last twelve days of a thirty-day billing cycle. While AT&T throttles its “unlimited data” mobile data plan customers who exceed 3 or 5 GB of data usage during a billing cycle, it does not data throttle its tiered mobile data plan customers who are offered plans for data usage of at least 30 GB per billing cycle, regardless of how much data they use.
Market researchers were told by “focus group” members, before AT&T’s implementation of data throttling, that it would be perceived as unfair by “unlimited data” customers. Consequently, these researchers advised AT&T that “[s]aying less is more, [so] don’t say too much” about data throttling. (See FTC Complaint for Permanent Injunction and Other Equitable Relief.) As predicted by this research, hundreds of thousands of AT&T customers complained to AT&T, the FTC, the Better Business Bureau and government agencies that their data plans were being effectively limited by the slow data speeds they were subjected to.
III. AT&T’s Defense of Adequate Disclosures to Customers
AT&T has responded to the FTC complaint by calling the FTC allegations “baseless”, by describing its data throttling as normal network management, and by stating that it alerted its customers about imminent data throttling by sending e-mails and text messages notifying them that they had crossed preset limits and would experience slower data speeds for the rest of the billing period. AT&T says that its practices are “fully transparent and consistent with the law and our contracts”. (See The FTC is suing AT&T for throttling its unlimited data customers, Washington Post Oct. 28, 2014.)
The FTC argues that, although AT&T’s service contracts permit it to “modify, deny, disconnect, or terminate the service of customers who use the service for …prohibited activities…[the agreements] do not state that an unlimited mobile data plan customer’s use of more than a specified amount of data is a prohibited activity. Nor do the agreements provide that Defendant may modify, diminish, or impair the service of unlimited mobile data plan customers engaged in permissible activities if these customers use more than a specified amount of data.” (See FTC Complaint for Permanent Injunction and Other Equitable Relief.)
The only information that was sent by AT&T regarding data throttling to its renewing customers stated, in July and August 2011, that
“To provide the best possible network experience, starting 10/01/11, smartphone customers with unlimited data plans whose usage is in the top 5% of users can still use unlimited data plans but may see reduced speeds for the rest of their monthly billing cycle. We’ll alert you if you near the top 5%. To avoid slowed speeds you may use Wi-Fi or choose a tiered data plan. Details @ att.com/dataplans.”
The FTC alleges that the text message and email alerts referred to in this statement were only sent to a minority of AT&T’s unlimited data customers prior to renewing their service plans, and even these alerts do not adequately inform the customers of the data throttling program. (See FTC Complaint for Permanent Injunction and Other Equitable Relief.)
Although AT&T has been quoted as saying that its data throttling is consistent with its service contracts, the section of its service contract that appears to be most relevant to its alleged data throttling practice is section 6.10.1, “What Are the General Terms that Apply to All DataConnect Plans?”, which states
“We may, at our discretion, suspend your account if we believe your data usage is excessive, unusual or is better suited to another rate plan. If you are on a data plan that does not include a monthly MB/GB allowance and additional data usage rates, you agree that AT&T has the right to impose additional charges if you use more than 5 GB in a month, provided that, prior to the imposition of any additional charges, AT&T shall provide you with notice and you shall have the right to terminate your Data Service.” (See Wireless Customer Agreement, Spring 2012, Exhibit D-1.)
If section 6.10.1 is applied to unlimited data service plans, it would allow only an additional service charge for exceeding 5GB data usage in a month, rather than data throttling to reduce data speeds.
No other sections of the agreement appear to allow data throttling in response to normal, non-prohibited data usage above a preset limit. Section 3.2 states that “Actual network speeds depend upon device characteristics, network, network availability and coverage levels, tasks, file characteristics, applications and other factors.” This would not appear to cover intentional reduction of data speeds by AT&T.
IV. What Should AT&T “Unlimited Data” Smartphone Customers Do Now?
1) Remember – If It Sounds Too Good To Be True, It Probably Is Too Good To Be True
This old saying doesn’t help now as far as the AT&T “data throttling” program is concerned. The “cat is out of the bag” on that. In the future, however, consumers and businesses should remember it for other offers of goods or services. If only one of several companies is offering a deal that is much cheaper than their competitors, they should wonder how they can afford to cut their price. Will they provide the same quality? For the same period of time? Do they have some advantage that their competitors don’t have? If you cannot think of a reason why a company can offer the same product or service for less, be skeptical.
2) Wait and look for the FTC lawsuit to result in a judgment or a settlement that will require AT&T to give some kind of rebate to its “unlimited data” customers for the service they were promised and they paid for, but did not receive.
This is the easiest way to deal with this data throttling mess for customers who want to continue their AT&T Wireless “unlimited data” service plan. If someone qualifies as a customer who was adversely affected by AT&T’s data throttling, and the FTC lawsuit succeeds or is settled, they will eventually be notified by AT&T of any rebate they are entitled to under the judgment or settlement. In the meantime, you can read in my book, Every1’s Guide to Electronic Contracts, the discussions of the remedies the FTC has asked the court to award it against AT&T – a permanent injunction (Part A, Chapter 8 g)), rescission or reformation of the contracts of customers adversely affected by data throttling (Part A, Chapter 7 c) and e)), and restitution to customers of money paid by them for services that were not received (Part A, Chapter 8 f)). The FTC lawsuit also asks for “disgorgement” by AT&T of “ill-gotten monies” obtained through data throttling. This is a fairly new remedy concept in contract law, which would require AT&T to pay to its data-throttled customers the profits that it made with the money that was gained from overcharging them.
If you take the $300 million estimate of AT&T overcharging by some analysts and divide it by the 3.5 million customers that the FTC alleges have been adversely affected by data throttling, the average affected customer might be entitled to a rebate of about $85. If the high end estimate of $1 billion in damages to consumers were the final result of the FTC’s lawsuit, that would give a rebate of about $285 to each affected customer.
3) Arbitrate or Litigate?
If it is worth their time and money, a data-throttled customer might want to try to get their service contract overcharges back from AT&T without waiting for a rebate from the FTC lawsuit. In that case they would probably have to follow the arbitration procedure required by Section 2 of the AT&T Wireless Customer Agreement. (See Wireless Customer Agreement, Spring 2012, Exhibit D-1.) The agreement provides that AT&T will pay the costs of arbitration for claims of less than $75,000, and that attorneys’ fees might be paid to a customer whose complaint succeeds in arbitration.
If a customer chooses to pursue their claim against AT&T in arbitration, he or she cannot also be a member of a class action against AT&T for the same claim. Sometimes, a customer contract that requires arbitration of disputes can be overcome in a class action lawsuit that argues that individual arbitration is not a sufficient procedure to address harm caused to a large number of customers. The likelihood of a class action is less in a case like this where the FTC has already sued to recover remedies for all of the customers allegedly affected by AT&T’s data throttling practice.
Section 2.1 of the AT&T Wireless Customer Agreement also permits a customer to sue in small claims court regarding a dispute with AT&T regarding its wireless service. If it is worth their time and money, a data-throttled customer might consider this alternative. If a customer is compensated for their harm through arbitration or a small claims court proceeding, they would not be able to also receive compensation from the FTC lawsuit. Customers would have to prove the monetary amount of any harm caused to them by data throttling in an arbitration or small claims court proceeding. In the FTC’s lawsuit, the amount of monetary harm to each affected customer would probably be estimated based on the periods of their data-throttled service under the AT&T “unlimited data” service plan.
I will update you on any future major developments in this FTC lawsuit.
Image courtesy of Stuart Miles at FreeDigitalPhotos.net