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December 1999

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 be disclosed?

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 was.

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.



 

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