I dont see how they can get in trouble for not providing their advertised speeds so long as the speed degradation only occurs outside of their direct network.
Either way you cut it, the ISP is in the wrong. The peering point is 100% within their control, and Level3 has gone above and beyond to try to ease congestion, the ISP has outright refused.
How on earth can you side with the ISP on this - do you work for one?