Selling Treated and Synthetic Gems: What's Unfair and Deceptive?

May 1998

Managing:Legal Issues

Selling Treated and Synthetic Gems: What's Unfair and Deceptive?

State laws give consumers the right to sue retailers for a range of selling practices. Learn your legal obligations. And don't believe simply conforming to FTC guidelines protects you. It doesn't.

By William H. Donahue Jr.

Today it's gemstone treatments and synthetics; tomorrow it will be something else. Regardless of the issue, jewelers need to understand the legal concepts protecting consumers.

Jewelers deal every day in a product that is particularly hard for consumers to buy. Unlike many retailers who sell products with standard, regulated features, jewelry store products such as gemstones are often unique, non-standard, ever-changing substances. Consumers would need gemology degrees to keep up with the various treatments, synthetics, mine discoveries and other factors that affect their purchases. As a result, they rely to a high degree on the jeweler's expertise. That's good for well- educated jewelers, but a legal minefield for anyone else.

Let's look at some typical statements made every day in jewelry stores.
Jeweler to customer: "This gemstone is not treated."Is he sure?
Jeweler to customer: "This ruby is deep red and exceptionally beautiful."Is that all? Is it treated in some way?
Now let's look at a statement that, unfortunately, could become more common in courtrooms:
Consumer to judge:"I wouldn't have bought this gem if I'd known it was treated."

Back up the first two statements with gemological knowledge and an understanding of your legal obliga-tions. If you do this scrupulously, you may never come close enough to a courtroom to hear the third. What follows is a closer look at these three statements and your obligations under most state consumer protection laws.

Giving False Information
"This gemstone is not treated."

Under all state statutes, knowingly giving false information that is relevant to the consumer's decision to buy is illegal. That's probably the easiest problem to avoid. You don't say a gem is untreated when it is. You don't call a synthetic a natural gem.

Be careful, however. In most states, it doesn't matter whether you're unaware the information is false. Under most laws, the consumers don't have to prove you intended to defraud them. For example, New Jersey law clearly holds merchants liable for giving incorrect information even when they have acted in good faith.

For this reason, it's critical that you and all members of your sales staff know what you're selling. A training course for employees and choosing more reliable suppliers can be a lot less expensive in the long run than consumer fraud litigation. If it's reported in the news media, that can be more ruinous than a lawsuit. The best way to prevent consumer fraud problems is to be honest and knowledgeable.

Omitting Information
"This ruby is deep red and exceptionally beautiful."

The knowing omission of material facts, commonly known as "failure to disclose" is a violation of the law. The two critical terms here are "knowing"and "material." Unlike with affirmative representations (see "Giving False Information" above), where you are liable even if you don't know the information you're giving is wrong, most states don't hold merchants liable for failing to reveal information they don't know. This will likely not work as a defense, however, if a customer can establish you should have had the information or easily could have had it. And it certainly won't work as a defense if it's information you have, but fail to disseminate to your sales staff.

Once again, your best defense is a careful study of gem treatments and synthetics and rigorous on-going training on these topics for every member of your staff who talks with the public is your best defense.

Material Facts
"I wouldn't have bought this gem if I'd known it was treated."

Even if you have knowingly failed to disclose a fact about your product, that fact has to be material to the decision to buy. As with so much else in the law, the definition of materiality varies from state to state, but a good rule of thumb is that if the information withheld could reasonably influence the consumer's decision to buy, it is material.

In many cases, simply the statement "I wouldn't have bought it if I had known" will be enough to get a consumer a hearing in front of a judge or jury. This is where many jewelers get into trouble. A jeweler may view a permanent gemstone treatment such as lasering as immaterial and, thus, not disclose it. In this example, the FTC Guides for the Jewelry Industry back him up, saying that because lasering is permanent, it need not be disclosed.

But the FTC Guides aren't always the place to look for guidance where state consumer protection laws are concerned, or even as guidance for handling customers outside of court. A jeweler in Philadelphia learned this when his angry customer went to a TV consumer reporter and vented his rage at not knowing his diamond had been lasered (not filled, just lasered). In some cases, the court of public opinion can be as threatening as a court of law.

The FTC Guides say it's unfair and deceptive to fail to disclose any treatment that isn't permanent or that creates special care requirements, assuming consumers wouldn't care. But a consumer who says his fascination with gems rests on the fact they are wonders of nature – not wonders of technology – could sway a court to his way of thinking regardless of the FTC Guides.

The FTC Guides
Despite these facts, the FTC Guides for the Jewelry Industry should still be reviewed and understood by everyone selling jewelry to the public (Jewelers of America distributes an excellent layman's guide to the FTC Guides. Call JA at 800-223-0673).

So far we've discussed examples of jewelers who are sued even when they comply with FTC Guides. There's also the matter of how the FTC Guides are used in court when jewelers violate them.

If you are sued under such circumstances, the guides are admissible in court to establish you violated state law (even though they are federal guides only). State attorneys general can use them in actions brought to stop illegal trade practices. In many states, a violation of these guides is an automatic violation of the state law.

The Bottom Line
Learn the FTC Guides, but be even more vigilant than they are concerning controversial industry treatments such as lasering. Inform consumers about them positively. Lasering may be common trade practice and acceptable to the FTC, but to the consumer who feels betrayed, it doesn't matter. Especially in court.

Consumer Protection: The Law of the Land

Every state in the country has some version of a law that prohibits what is known as UDAP, or unfair and deceptive acts and practices.

These laws are modeled after federal consumer laws enforced by the FTC, but they are different from the federal law in at least one way that is important for retailers.

While federal and state consumer laws allow the government to go to court and seek an injunction to stop illegal trade practices (plus assess damages and fines), the state laws also give consumers a private right of action. In other words, they give your customers a right to sue you for a wide range of selling practices.

What's worse, if the consumer wins in court, he or she may be able to collect far more than the purchase price of the item in question. Many state consumer laws allow triple damages, punitive damages and attorney's fees.


How do these laws work?
First and foremost, you have to remember why they were enacted. These statutes came into being to stop

sales practices the FTC and state legislatures saw as unfair to consumers. The wording of these laws varies from state to state, but their intent is fairly consistent. They use terms such as "unfair, fraudulent, deceptive, misleading, abusive and unconscionable" to define the kinds of practices that are prohibited. They are referred to by names such as "consumer sales acts, consumer fraud acts, unfair trade practices acts and consumer protection acts." New Jersey's statute, for example, is called "The Consumer Fraud Act" and its language is very broad:

"The act, use or employment of an unconscionable commercial practice, deception, fraud, false pretense, false promise, misrepresentation, or the knowing concealment, suppression, or omission of any material fact with intent that others rely on such, in connection with the sale or advertisement of any merchandise ... whether or not any person has in fact been misled, deceived or damaged thereby, is declared to be an unlawful practice."

New Jersey courts have said about the act: "The Consumer Fraud Act is to be liberally construed in favor of consumers." Similar laws around the country have been interpreted in much the same way by a wide variety of courts.

William H. Donahue Jr. is an attorney practicing in New Jersey.

Copyright © 1998 by Bond Communications.


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