The Federal Trade Commission sued AT&T on Tuesday for deceptive and unfair "data throttling."
The complaint alleges that the mobile service provider charged millions of customers for "unlimited" data plans while cutting data speeds, sometimes by nearly 90 percent. This practice of slowing down speeds to near-impractical levels after the user has crossed a usage threshold is called data throttling.
"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 a statement. "The issue here is simple: 'unlimited' means unlimited."
At least 3.5 million unique customers were affected, the FTC said.
"The FTC's allegations are baseless and have nothing to do with the substance of our network management program," Wayne Watts, AT&T senior executive vice president and general counsel, said in a statement.
He added that the case was "baffling" and that the company has been "completely transparent with customers since the very beginning," including a well-reported press release on the matter in 2011.
Read MoreAT&T earnings miss as mobile profit margins decline
The data program has only affected about 3 percent of customers, Watts said.
In addition to its highest-priced "unlimited data" plan, rival carrier T-Mobile offers a 5 gigabyte plan with "unlimited data" and explains on its website that after the allotted amount is used up, data speeds slow.
"AT&T and Verizon are offering various forms of trickery to lock their base in because they don't know what to do," T-Mobile USA's president and CEO, John Legere, said earlier on CNBC's "Halftime Report."
"We're porting on a post-paid basis 2.2 to 2.3 to 1," he said. "It's everyday, 2.2 customers come to us from them and one goes out the door. So we can compete."
AT&T declined to comment on Legere's remarks but did say this: "It's worth noting that our postpaid churn, or turnover, was just 0.99 percent—a record for the third quarter. Churn is one of the surest indicators of customer satisfaction and retention."
Verizon did not immediately respond to a request for comment on the T-Mobile chief's remarks.
"Wireless customers across the country are complaining that their supposedly 'unlimited' data plans are not truly unlimited, because they are being throttled and they have not received appropriate notice," Federal Communications Commission spokesman Neil Grace said.
"The FCC has been actively investigating throttling practices since this summer, when Chairman Wheeler sent letters to major nationwide wireless carriers about these practices."
Grace recommended that customers contact the FCC if they experience throttling.
This story originally appeared on CNBC