Managing: Legal Issues
Gem Treatments:The End of Non-Disclosure?
If proposed amendments to the FTC Guides are approved,
federal law will require disclosure on
almost every gemstone treatment, regardless of its permanence
or special-care needs
In June, the Federal Trade Commission proposed two amendments
to its Guides for the Jewelry Industry. The first amendment,
to Section 21.13 of the Guides, would require disclosure of laser-drilling
of diamonds. The industry now agrees this is necessary.
The other amendment, to Section 23.22, is more controversial.
It would require disclosure of any gemstone treatment that significantly
affects the gem's value. A comment period on the proposals ended
Aug. 31. In this and next month's "Legal Issues," we
will summarize the jewelry industry's response to the FTC. At
press time, the FTC had issued no indication about a final decision
on these amendments.
Why It Matters
If approved, the second of these two amendments calling
for disclosure of any treatment affecting value would
be one of the most far-reaching federal actions affecting the
jewelry industry. It would redefine what constitutes an unfair
and deceptive trade practice in such a way that nearly all gemstone
treatments would have to be disclosed.
For all practical purposes, the only issues raised in FTC
actions would be whether a gemstone has undergone a "treatment"
and whether the treatment has a significant effect on the stone's
value. Permanence of the treatment or whether it requires special
care would no longer be the only requirements for disclosure,
as they are now.
The amendment is important also because it would affect state
consumer protection actions. In most states, violating the FTC
Guides is considered an automatic violation of state consumer
laws. In states such as New York, where consumer-protection laws
allow an "FTC compliance defense," that defense would
be sharply narrowed. In those states, a jeweler once was able
to defend himself by showing The Guides required disclosure only
if a gem treatment was impermanent or required special care.
If the amendment is approved, that jeweler would have to disclose
all treatments significantly affecting value, regardless of their
permanence or care requirements, to get the benefit of the defense.
Nearly all gem treatments affect value, usually increasing
the gem's value (even if it's still less valuable than a comparable
untreated gem), so jewelers will have to be much more comprehensive
about disclosure than in the past if the change is approved.
What Led the FTC to This Step?
The FTC proposed its amendments in response to a petition
filed in December 1998 by a coalition of industry organizations
led by the Jewelers Vigilance Committee. The petition requested
an amendment to Section 21.13 of The Guides to require disclosure
of laser-drilling of diamonds.
The petition argued laser drilling affects the value of the
diamond and that is one of the reasons it should be disclosed.
Because a laser-drilled diamond is less valuable than a comparable
non-drilled diamond, it should be an unfair and deceptive trade
practice to sell such a stone without telling the buyer it has
been laser-drilled, said the petition.
The FTC simply applied the JVC group's thinking on laser drilling
to all gem treatments to come up with its second proposed amendment.
If laser-drilling should be disclosed because it affects value,
the FTC reasoned, shouldn't any treatment that affects value
What the Industry Said
Cecilia Gardner, executive director and general counsel of
the JVC, and Matthew Runci, president of Jewelers of America,
submitted a response to the FTC's proposed amendments that was
supported by the Diamond Promotion Service, American Gem Society,
Diamond Manufacturers and Importers of America, World Federation
of Diamond Bourses and New York Diamond Dealers Club.
They support both amendments, but urge the FTC to include
the following italicized language in both sections: "Permanent
treatments that do not create special care requirements should
be disclosed if the treatment has a significant effect on the
stone's value, if said treatments are known or reasonably should
have been known at the time of the sale and if a consumer, acting
reasonably under the circumstances, could not ascertain that
the stone has been treated."
This language is meant to protect jewelers from liability
for failing to disclose treatments they did not and reasonably
could not discover. Several groups and individuals who submitted
comments raised the point that it's often difficult or economically
impractical for a retailer to determine whether a gemstone has
been treated in some way. This is particularly true with small
gems or gems already set into jewelry.
It's also true with treatments that are virtually or completely
undetectable using existing technology such as the GE/POL color
treatment. There seemed to be a consensus among many respondents
that a jeweler sometimes has to rely on the integrity of his
or her supplier and should not be held responsible if deceived.
Without this language, The Guides would impose on a jeweler what
is referred to in the law as strict liability, in other words,
liability regardless of the fact the jeweler acted in good faith
and with due diligence.
It's important to note that if incorporated into The Guides,
this language will not serve as a defense in most state court
consumer protection claims where state law does impose strict
liability. Most state laws impose strict liability for giving
incorrect information as opposed to failing to disclose information.
The most common example is a customer who asks whether a gem
is treated and you say no. Under most consumer protection laws,
you would be liable if you are wrong even if your supplier told
you the gem was not treated and you had no way to tell that it
So unless you are absolutely certain, never tell a customer
a gem was not treated. The task force's response also points
out the vagueness of the term "significant" as it pertains
to value, and suggests that clarification may be necessary. If
the FTC does not define "significant," federal and
state courts will have to. In January, we'll look at the rest
of the industry's responses, many of which also questioned whether
value is the right criteria to use in requiring disclosure.
by William H. Donahue Jr.
William H. Donahue Jr. is an attorney practicing in New Jersey.
Copyright © 1999 by Bond Communications.