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September 1999

Managing: Legal Issues

Understanding Materiality

How do you decide what to disclose about a gemstone or diamond? There's one simple legal rule: If the information might influence a consumer's decision to buy, it's a material fact and he or she has a right to know

In June, the Federal Trade Commission proposed amending its Guides for the Jewelry Industry to require disclosure of diamond lasering to consumers. When the Guides were last revised in 1996, the FTC said lasering was permanent and didn't require special care, the two key reasons it usually requires for disclosure.

Now its opinion has changed. Among arguments favoring disclosure in a petition submitted by the Jewelers Vigilance Committee is a key observation: a lasered diamond is worth less than a non-lasered one of comparable grade and size. That lasering affects a diamond's value is a material fact. "Material" is a legal term that lies at the heart of every state consumer protection law. These laws say two essential things:

  • It is unlawful to misrepresent material information.
  • It is unlawful not to disclose material information.

What's Material?
Courts interpreting "material" have defined it as any fact that would reasonably affect a consumer's decision to buy. The question you must ask yourself is what do you know about a diamond that's likely to matter to a consumer? Simply put, could consumers reasonably say they would not have made the purchase (or would not have paid the price asked) if they knew the fact in question before the sale? If so, a court could find that fact to be material.

Interestingly, when the FTC proposed changing the laser disclosure rule in June, it also proposed changing colored gem disclosure rules. The arguments used to require diamond lasering disclosure should apply also to disclosure of treated colored gems, the FTC reasoned. Though ruby heat treatment is permanent and doesn't require special care, for example, a heated ruby costs less than an unheated ruby of the same quality. Again, that's a material fact that could affect a consumer's decision to buy.

Waiting for Comments
At press time, the FTC was waiting for public comment on its two proposed changes (the deadline was Aug. 31), but jewelers on the front lines shouldn't wait for the passage of these two amendments to disclose all material facts. If a consumer sues you under state consumer protection laws, compliance with the FTC Guides is not an adequate defense. If a consumer says she wouldn't have bought a gem had she known it was treated, that's enough to get a trial in most courts. It doesn't mean the consumer would win, but getting to that point will cost you in time, money and reputation.
Think about all the treatments the jewelry industry deals with daily. Some are controversial, such as the GE POL diamond process, which improves the color of certain diamonds (see "GE POL: It's Material" on facing page). Some are well-known and widely accepted, such as the bleaching
of pearls or the heat-treating of sapphires and rubies. Regardless of trade acceptance, most consumers would consider these treatments material facts that could affect their decisions to buy.
Cecilia Gardner, executive director and general counsel of the JVC, believes that in situations such as the GE POL process, the best way to avoid legal problems is to tell customers some treatments can't be detected currently, therefore, the diamonds they are buying may have been treated.

Is it lawful to continue not to tell the whole truth and nothing but the truth about gemstones? Applying the rule of materiality, the answer is no.

– 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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