The lawsuit is the reason that disclosure is in the Terms of Service now. It was not previously in there, that is why they were sued. The settlement required them to disclose this practice so that customer's could make a potentially more informed decision about what Netflix offers as a service.
You are correct that it really only affects situations where demand outstrips available supply.
While I believe internally Netflix called it smoothing or something like that, throttling isn't an inaccurate term either.
Much of the anger came from the fact that an existing customer could put something in their queue & see "Long Wait" which may mean that movie would probably be delayed weeks or even months. Meanwhile their friend might setup a new account that weekend & get that same movie immediately. This lead to people feeling as though Netflix was shafting existing customers while at the same time giving new customers an unrealistic experience.
Many sign up thinking they are going to be saving a lot of money by going with Netflix, but if their main interest is new releases then they are going to have difficulties getting every new release in a timely manner. This is something that Netflix doesn't really disclose very well & they are a little misleading with their marketing as you'll often see them promoting mainly new releases in a lot of their marketing material.
One more thing is that Netflix has gone as far as hiding certain new releases on it's New Releases section on purpose so as to prevent people from being able "hog" all the new releases. This seems rather anti-customer & goes against their original motto "Connecting People With Movies They'll Love", which really boils down to "We want you to use our recommendation engine which steers you towards movies that cost us the least...".