Professional Jeweler Archive: Industry Answers FTC Questions

February 2000

Managing/Legal Issues

Industry Answers FTC Questions

Trade notables answer seven FTC questions concerning the proposed changes to the Guides for the Jewelry Industry

In June 1999, the Federal Trade Commission proposed two amendments to its Guides for the Jewelry Industry. An amendment to Section 21.13 would require disclosure of laser-drilling of diamonds, a practice most in the jewelry industry agree is necessary.

An amendment to Section 23.22 would require disclosure of any gemstone treatment that significantly affects the gem’s value. It seemed to be the more controversial of the two at first. But with several modifications, it also appears to have garnered broad industry support.

FTC Asks, Industry Answers

The FTC asked for general comments on the proposed amendments and for responses to seven questions.

In December, Professional Jeweler looked at the legal implications of the proposed changes and some of the responses the FTC received (pp. 87-88). This month we look at more of the industry’s responses to the FTC. The comments reflect changing and diverse industry points of view. The FTC’s final ruling is expected later this year.

FTC Question: “Is it a prevalent practice in the jewelry industry to require disclosure of laser drilling at all levels of the transaction up to the point of sale to the consumer?”

Many trade associations, such as the American Gem Trade Association, responded it is not only a prevalent practice, but is required by many associations. But Zale Corp. pointed out such disclosure doesn’t occur at all levels of the industry.

FTC Question: “Would a provision in the jewelry guides to disclose laser drilling to consumers inhibit advertising or create additional costs to retailers that could be passed on to consumers in the form of significantly higher prices?”

The most common response was no, but some said midmarket prices might be affected substantially unless jewelers are required to disclose only if they know or should have known of the treatment. In other words, they believe a jeweler who reasonably relies on his supplier’s representations should not be liable for non-disclosure.

The National Retail Federation proposed that disclosure of laser drilling be required only for diamonds of 0.25 carat or more. This proposal reflects an oft-repeated concern that detecting laser drilling or other treatments in small stones in finished jewelry would not be economically feasible for retailers

FTC Question: “Is there a disparity in value between a laser-drilled diamond and a non-treated diamond with the same clarity rating?"

There was almost unanimous agreement there is a disparity. In terms of laser drilling and other treatments, the question many raised is “How great a disparity?”

FTC Question: “Should The Guides provide guidance as to how laser drilling should be disclosed to consumers? If so, what guidance should be provided?”

Responses were mixed. AGTA said no to FTC guidance, reasoning the method of disclosure should be no different than for any other treatment noted under The Guides. Zale Corp. said only general guides would be appropriate, leaving specifics to individual retailers. The National Association of Jewelry Appraisers believes specific guides should be given.

FTC Question: “Gemstone treatments that are permanent and do not create special care requirements currently do not have to be disclosed under The Guides. Is there a disparity in value between a gemstone treated in a manner that is permanent and does not require special care and one that is not treated? How many different gemstones and gemstone treatments fall into this category?”

Respondents generally agreed there is a disparity in value and that many treatments fall into this category. Again, they’re concerned that determining the size of the disparity could be difficult.

Antoinette Matlins, author of Jewelry & Gems: The Buying Guide, wrote “Treated gemstones cost less than natural gemstones of comparable quality. It is that simple. What is difficult at this moment is determining just how much price disparity there is between natural and treated gems, or to be more accurate, how much price disparity there will be in the not-too-distant future.” Matlins said that once more consumers know about gemstone treatments, prices will likely drop for treated gems and rise for untreated ones.

FTC Question: “Does industry policy provide disclosure of permanent gemstone treatments that do not create special care requirements?”

A wide array of industry associations require disclosure of permanent gemstone treatments that don’t require special care, but many confirmed that no industry-wide policy exists. AGTA proposed that Section 23.22 be amended to say it’s unfair or deceptive to fail to disclose that any gemstone has been treated in any manner and to fail to disclose that the treatment is not permanent, if such is the case. If this proposal were adopted, the question of effect on value would be irrelevant because all treatments would be disclosed, regardless of effect on value.

FTC Question: “Would guidance in the Jewelry Guides calling for disclosure of permanent gemstone treatments that do not require special care inhibit advertising or create additional costs for retailers that could be passed on to consumers in the form of significantly higher prices? Would this guidance adversely impact competition in the jewelry industry in any way?”

While AGTA said no to both of these questions, Zale Corp. raised the point that stone-by-stone disclosure, as opposed to general disclosure in advertising, would force mass retailers out of the colored gemstone business. Gemstones sold by such retailers don’t command prices that support quality-assurance and disclosure efforts.

NRF and Cecilia Gardner of the Jewelers Vigilance Committee suggested requiring disclosure only if the retailer knows or reasonably should know of the treatment. Gardner said a retailer should be protected from liability when reasonably relying on representations by vendors.

Materiality, Again

At the heart of the FTC’s proposed amendments is the issue of materiality. A treatment that affects value is material to a consumer. “Material” in consumer law means a fact that would reasonably affect a person’s decision to buy. If a customer buys a gemstone that’s not as valuable as he thinks because it’s treated, that is a material fact.

Another issue of materiality from the consumer viewpoint is the belief a gemstone is or should be natural. The simple fact the gemstone was made to look the way it does by a man-made process may be very important to some consumers.

Under many state consumer protection laws, all consumers have to say to bring a lawsuit is they would not have bought the gemstone if they had known it was treated. They may not ultimately win the action because a judge or jury could decide not to believe the consumer, but do you want to take the chance?

The Outlook

The consensus of most organizations that responded to the FTC is the proposed amendments would benefit the industry and consumers. The need for further clarification of such terms as significant effect on value and the economic impact on midmarket retailers are concerns for some. So is the fear the amendment would impose liability on retailers who reasonably relied on vendors and suppliers to disclose.

How the FTC will respond has yet to be seen, but it seems likely the amended Guides will make a treatment’s effect on a gem’s value the primary issue in future consumer-protection non-disclosure cases. In cases where it’s not clear what effect a treatment has value, your best bet is full disclosure. Teach your sales staff to do this in a positive rather than apologetic way. It will allow you to create educated and loyal customers and will be your best chance for preventing or defending future non-disclosure claims.

–by William H. Donahue Jr.

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

Copyright © 2001 by Bond Communications