[Federal Register Volume 65, Number 242 (Friday, December 15, 2000)]
[Rules and Regulations]
[Pages 78738-78744]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-31776]



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Part V





Federal Trade Commission





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16 CFR Part 23



Guides for the Jewelry, Precious Metals and Pewter Industries; Final 
Rule

  Federal Register / Vol. 65, No. 242 / Friday, December 15, 2000 / 
Rules and Regulations  

[[Page 78738]]


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FEDERAL TRADE COMMISSION

16 CFR Part 23


Guides for the Jewelry, Precious Metals and Pewter Industries

AGENCY: Federal Trade Commission.

ACTION: Final guides.

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SUMMARY: The Federal Trade Commission (Commission) announces that it is 
revising Secs. 23.13 and 23.22 of the Guides for the Jewelry, Precious 
Metals and Pewter Industries (Jewelry Guides or Guides), 16 CFR Part 
23. The Commission has combined Sec. 23.13, which addresses the 
disclosure of diamond treatments, with Sec. 23.22, which addresses 
treatments of other gemstones. The Commission also has revised these 
sections to provide for disclosure of any treatment to gemstones that 
significantly affects the value of the gemstone, which would include 
laser-drilling of diamonds.

EFFECTIVE DATE: April 10, 2001.

ADDRESSES: Requests for copies of this document should be sent to 
Public Reference Branch, Room 130, Federal Trade Commission, 600 
Pennsylvania Avenue, NW, Washington, DC 20580. Copies also are 
available on the Commission's website at www.ftc.gov>.

FOR FURTHER INFORMATION CONTACT: Robin Rosen Spector, Attorney, Federal 
Trade Commission, 600 Pennsylvania Avenue, NW, Washington, DC 20580, 
(202) 326-3740, [email protected]>.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Commission announces that it is revising Secs. 23.13 and 23.22 
of its Guides for the Jewelry, Precious Metals, and Pewter Industries, 
16 CFR Part 23 (Jewelry Guides or Guides). The Jewelry Guides address 
claims made about precious metals, diamonds, gemstones, and pearl 
products.\1\ The Guides explain how to describe these products 
truthfully and non-deceptively and how to avoid unfair or deceptive 
practices. Sections 23.13 and 23.22 of the Guides address the 
disclosure of certain treatments to diamonds and other gemstones that 
are performed to improve their beauty or durability. Some treatments 
are not permanent because their effects fade over time. For example, 
gemstones sometimes are treated with a colorless oil that improves the 
color of the stone and helps to mask certain imperfections. Other 
treated gemstones require special care to retain the benefit of the 
treatment. For example, a stone that is fracture-filled (i.e., injected 
with plastic or glass to hide cracks and improve its appearance) cannot 
be cleaned with certain types of jewelry cleaners, because the cleaner 
could adversely affect the treatment. In addition, re-cutting or re-
setting a fracture-filled stone could damage the treatment.\2\ Other 
gemstone treatments are permanent and do not create special care 
requirements, but the treated gemstone is not as valuable as a similar 
untreated stone.
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    \1\ The Commission issues industry guides to provide guidance 
for the public to conform with legal requirements. Industry guides 
are administrative interpretations of the laws the Commission 
administers. Industry guides explain how to describe products 
truthfully and non-deceptively and identify practices the Commission 
considers unfair or deceptive.
    \2\ The American Gem Trade Association (AGTA) publishes a manual 
that contains a comprehensive listing of gemstone treatments and 
information regarding the permanence of the treatment and special 
care requirements. AGTA-2 (022A).
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    On June 8, 1999, the Commission solicited comment on a proposal to 
revise Sec. 23.13 of the Guides to require disclosure of laser-drilling 
of diamonds.\3\ The Commission also solicited comment on a proposal to 
revise Sec. 23.22 of the Guides, which addresses other gemstone 
treatments, to provide for the disclosure of treatments similar to 
laser-drilling--those that are permanent and do not create special care 
requirements for the stone, but significantly affect the value of the 
stone. The Commission received 40 comments.\4\ After reviewing these 
comments, the Commission has decided to revise the Guides to provide 
for disclosure of permanent gemstone treatments that significantly 
affect the value of the gemstone, such as laser-drilling.
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    \3\ 64 FR 30448 (June 8, 1999).
    \4\ In the remainder of this FRN, the comments are cited to by 
an abbreviation of the comment name and the comment number. Attached 
to this FRN as Appendix A is a list of the comment name, 
abbreviation and comment number used to identify each commenter. The 
comments numbered 1 to 21 were received in response to the 
Commission's first request for comment dated June 8, 1999. 64 FR 
30448. The comments numbered 1A to 22A were received after the 
Commission extended the deadline to submit comments. 64 FR 37051 
(July 9, 1999). Three comments were submitted twice, by US mail and 
by electronic mail. These comments are listed once and are referred 
to in this FRN by the number of the comment that was received first.
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II. Background

    On December 9, 1998, two jewelry trade associations, the Jewelers 
Vigilance Committee (JVC), a trade association promoting ethical 
jewelry sales practices, and the Diamond Manufacturers and Importers 
Association of America (DMIA), jointly petitioned the Commission to 
revise Sec. 23.13 of the Jewelry Guides to add laser drilling to the 
list of diamond treatments that should be disclosed.\5\ Laser drilling 
involves directing a laser beam at an inclusion and forcing acid 
through the resulting tunnel, thereby removing the inclusion or 
rendering it invisible to the naked eye. Thus, the diamond's appearance 
is improved.
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    \5\ Fifteen trade associations joined the JVC and DMIA petition: 
World Federation of Diamond Bourses; International Diamond 
Manufacturers Association; Diamond Promotion Services; Diamond 
Dealers Club of New York; Gemological Institute of America; 
International Society of Appraisers; Jewelers of America; American 
Gemstone Society; American Gem Society; United States Carat Club; 
International Confederation of Jewelry, Silverware, Diamonds, Pearls 
and Stones; American Gemstone Trade Association; Manufacturing 
Jewelers and Suppliers of America; International Standards 
Organization; and Diamond High Council. The petition is on the 
public record and copies are available by contacting the Public 
Reference Branch, Room 130, Federal Trade Commission, Washington, DC 
20580. The petition also has been posted on the Commission's website 
at www.ftc.gov>. For the remainder of this Federal Register Notice, 
the petition will be referred to as the JVC petition.
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    In a 1996 review of the Guides, the Commission determined, based on 
the record before it, that the failure to disclose laser-drilling was 
not unfair or deceptive. The evidence presented in the comments to the 
Commission indicated that laser-drilling of diamonds was ``a common 
practice and not an extraordinary process.'' \6\ Moreover, the evidence 
demonstrated that, while laser-drilling produces a small surface 
opening on a diamond, ``the majority of diamonds sold in the U.S. have 
similar surface imperfections.'' \7\ Surface imperfections are to be 
expected in diamonds, except in diamonds described as flawless. The 
record also reflected that disclosing laser-drilling in each 
advertisement or promotional description could be costly and the 
additional advertising costs could be passed on to consumers in the 
form of higher prices.\8\ At that time, there was a conflict in the 
industry regarding the need for and the appropriateness of disclosure. 
Therefore, the Commission decided not to amend Sec. 23.13 of the Guides 
to require disclosure.
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    \6\ 61 FR 27177, 27197 (May 30, 1996).
    \7\ Id. at 27196.
    \8\ Id. at 27197 n.305-06.
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    The JVC petition asks the Commission to reconsider its decision 
based on the following factors: (1) There is now widespread industry 
support for disclosure; (2) the amendment would promote industry 
disclosure and self-regulation; (3) disclosure would impose few costs 
on retailers, and therefore, no increased costs to consumers; (4) 
technological advances make it increasingly difficult for consumers to

[[Page 78739]]

detect laser-drilling; (5) consumers would not necessarily learn about 
laser-drilling through grading reports because most diamonds sold in 
the US are small stones that typically are not accompanied by such a 
report; (6) consumers may suffer economic injury by purchasing laser-
drilled diamonds without disclosure, because such stones are worth less 
than untreated diamonds; and, (7) laser drilling is no different than 
other permanent artificial processes that affect the value of products 
that already are required to be disclosed (e.g., cultured pearls must 
be identified as ``cultured'' because they are created by humans 
inserting an irritant into an oyster's shell and are worth less than 
natural pearls).

III. Laser-Drilling of Diamonds

A. Request for Comment

    The Commission tentatively concluded that the JVC petition 
demonstrated, contrary to the record before the Commission in 1996, 
that the failure to disclose laser-drilling is an unfair or deceptive 
trade practice. Therefore, in June 1999 the Commission solicited 
comment on a proposal to include laser-drilling as a treatment that 
should be disclosed.\9\ The FRN posed several questions regarding this 
proposed revision. Question 1 asked whether it was currently a 
prevalent practice in the industry to disclose laser-drilling at all 
levels of the transaction up to the sale to the consumer. Question 2 
asked: ``Would a provision in the Jewelry Guides to disclose laser-
drilling to consumers inhibit advertising or create additional costs 
for retailers that could be passed on to consumers in the form of 
significantly higher prices?'' Finally, Question 3 asked: ``Is there a 
disparity in value between a laser-drilled diamond and an untreated 
diamond of the same clarity rating?'
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    \9\ 64 FR 30448.
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B. Summary of the Comments

    The comments, except for one, support revising the Guides to 
provide for disclosure of laser-drilling. The comments responding to 
Question 1, however, indicate that there is not an industry consensus 
on whether disclosure currently is the prevalent practice. Two comments 
state that disclosure is the industry practice.\10\ One comment states 
that disclosure was the industry practice until the FTC revised the 
Jewelry Guides in 1996.\11\ Because the Jewelry Guides, as revised in 
1996, did not provide for disclosure of laser-drilling, this comment 
asserts that some industry members stopped disclosing the treatment. 
Two comments state simply that it is not an industry practice to 
disclose.\12\ One comment explains that ethical sellers disclose but 
unethical ones do not.\13\ With respect to Question 2 of the FRN, the 
comments are unanimous that disclosure will not result in additional 
costs.\14\ Finally, the comments, responding to Question 3 of the FRN, 
are also unanimous that a laser-drilled diamond is worth less than a 
similar untreated diamond.\15\ As one comment explains, a laser-drilled 
stone is not as rare as an untreated stone and therefore is less 
costly.\16\
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    \10\ JVC (006A); AGTA-1 (015A).
    \11\ Matlins (001A).
    \12\ NAJA (016); Zale (007A).
    \13\ ISA (014).
    \14\ Matlins (001A); ISA (014); NAJA (016); CJAO (005A); JVC-1 
(006A); Zale (007A); AGTA-1 (015A).
    \15\ Adamas (005); Sherman (007); Indenbaum (009); ISA (014); 
NAJA (016); Gaenzle (017); Matlins (001A); Rapaport (002A); Green 
(003A); Kapoor (004A); CJAO (005A); JVC-1 (006A); Zale (007A); Dua 
(013A); AGTA-1 (015A).
    \16\ Matlins (001A); see also NAJA (016) (``laser-drilled 
diamonds are less costly than similar clarity, non-drilled 
diamonds''); ISA (014) (``laser-drilled diamonds are generally less 
expensive than similar non-treated stones'').
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C. Analysis of the Comments

    The comments establish that a laser-drilled stone is worth less 
than an untreated stone of the same clarity rating. Diamonds are graded 
on clarity on a scale running from Flawless (F) to Included (I), 
reflecting the number and size of inclusions appearing in the 
stone.\17\ Laser-drilling can elevate a lesser quality diamond to a 
higher grade on standard clarity rating scales, increasing the stone's 
value. The JVC petition stated that the price differential between a 
diamond that has a natural black inclusion and one where laser drilling 
has removed the inclusion could be as much as twenty-five percent. Even 
more important, however, is the fact that the laser-drilled stone is 
worth less than a untreated stone of the equivalent clarity rating.\18\
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    \17\ The ratings in between, from highest to lowest, are: 
Internally Flawless (IF); Very, Very Small Inclusions 1 (VVS1); 
Very, Very Small Inclusions 2 (VVS2); Very Small Inclusions 1 (VS1); 
Very Small Inclusions 2 (VS2); Small Inclusions 1 (SI1); and Small 
Inclusions 2 (SI2).
    \18\ JVC Petition, at 6-8.
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    For example, if a diamond has a clarity rating of SI1 and has a 
natural black inclusion, the inclusion could be removed by laser-
drilling, improving the clarity of the stone to VS2. The stone would 
now be worth more than it was as a non-laser-drilled stone with a 
clarity rating of SI1. At the same time, the laser-drilled stone with a 
clarity rating of VS2 is worth less than a non-laser-drilled stone with 
a clarity rating of VS2. Laser-drilling produces a small surface 
opening on a diamond. These surface imperfections are similar to 
natural surface imperfections that are expected in diamonds unless they 
are described as flawless. Industry buyers and consumers nevertheless 
have a preference for diamonds that contain only naturally occurring 
imperfections.\19\ Accordingly, diamond appraisers and consumers place 
a lower value on laser-drilled stones in comparison to non-laser-
drilled stones of the same clarity.\20\
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    \19\ Matlins (01A); NAJA (011); ISA (014); AGTA-2 (022A).
    \20\ See ISA (014) (International Society of Appraisers comment 
stating that ``laser-drilled diamonds are generally less expensive 
than similar non-treated stones''); accord NAJA (011) (National 
Association of Jewelry Appraisers); see also Gaenzle (017) (consumer 
comment attaching a petition signed by 500 consumers requesting 
revision of the Jewelry Guides to provide for disclosure of laser-
drilling of diamonds because consumers are being deceived as to the 
value of laser-drilled diamonds).
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    In determining whether a practice is deceptive, the Commission 
considers whether there is a representation or omission that is likely 
to mislead consumers acting reasonably under the circumstances.\21\ The 
representation or omission must be material. Previously, the Commission 
had no basis on which to conclude that there were any significant 
differences between naturally occurring and man-made inclusions. New 
evidence, provided in response to the FRN suggests, however, that 
consumers and appraisers place a lower value on laser-drilled diamonds 
than on comparable diamonds with naturally occurring inclusions. 
Because laser-drilled diamonds are worth less than comparable non-
drilled diamonds, failure to disclose laser-drilling may lead consumers 
to believe a laser-drilled stone is as valuable as an untreated stone 
of the same clarity rating.\22\ In addition, not providing for 
disclosure inadvertently may have created an avenue for unscrupulous 
marketers to overcharge consumers for laser-drilled stones. Consumers 
are at a disadvantage due to the imbalance of information that 
currently exists regarding laser-drilling of diamonds. As a result, 
unscrupulous marketers can charge consumers the same price for a laser-
drilled stone with, e.g., a VS2 clarity rating, that they would charge 
for a untreated stone with

[[Page 78740]]

a VS2 clarity rating, even though the laser-drilled stone is worth less 
than the untreated stone.\23\
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    \21\ Deception Policy Statement, Cliffdale Associates, Inc., 103 
F.T.C. 110, 174 (1984), Letter dated Oct. 14, 1983, from the 
Commission to Chairman John D. Dingell.
    \22\ See Gaenzle (017) (consumer comment attaching a petition 
signed by 500 consumers requesting revision of the Jewelry Guides to 
provide for disclosure of laser-drilling of diamonds because 
consumers are being deceived as to the value of laser-drilled 
diamonds).
    \23\ Although laser-drilling adds to the cost of a stone, the 
amount added is substantially less than the price differential 
between a non-lasered stone of a certain clarity rating and a stone 
that achieves that clarity rating as a result of laser-drilling. JVC 
Petition, at 6-8.
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    Because the record indicates that failure to disclose laser-
drilling may mislead consumers as to the value of the diamond, the 
Commission has concluded that failure to disclose laser-drilling is 
deceptive and that the benefits to consumers of requiring sellers to 
disclose laser-drilling outweigh any potential costs.\24\ Accordingly, 
the Commission is revising the Jewelry Guides to require laser-drilling 
of diamonds to be disclosed. The manner in which the Guides require 
disclosure of this treatment is discussed in Part V below.
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    \24\ As explained above, the JVC petition asserts that 
disclosure will not result in additional costs because it is already 
industry practice to disclose laser-drilling at all levels of the 
transaction up to the sale to the consumers. Although the comments 
do not agree that disclosure is currently a widespread industry 
practice, the industry unanimously asserts that disclosure of laser-
drilling to consumers will not result in additional costs that could 
be passed on to them in the form of higher prices. Thus, to the 
extent requiring disclosure changes industry practice, the changed 
practice will benefit consumers. Further, the disclosure requirement 
does not apply to general ads; the Guides only require that 
disclosure be made prior to sale.
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IV. Other Permanent Gemstone Treatments

A. Request for Comment

    The Commission's FRN also sought comment regarding proposed changes 
to Sec. 23.22 of the Guides, which addresses treatments to gemstones 
generally. This section states that it is unfair or deceptive to fail 
to disclose that a gemstone has been treated in any manner that is not 
permanent or that creates special care requirements and to fail to 
disclose that the treatment is not permanent, if such is the case. As 
explained above, some gemstone treatments are not permanent and, as a 
result, the color of the stone may fade or inclusions may become more 
visible as the treatment fades. In addition, some treated gemstones 
require special care. The Commission determined, during the 1996 
revision of the Guides, that consumers would not expect a gemstone to 
change over time and should be made aware of any special care 
requirements necessary to preserve the product. Accordingly, Sec. 23.22 
provides for disclosure of non-permanent gemstone treatments and 
treatments that create special care requirements for the gemstone.
    In light of the petition's evidence about laser-drilling, the 
Commission sought comment on whether consumers may be injured by non-
disclosure of other permanent gemstone treatments that do not create 
special care requirements but do affect the value of the stone. For 
instance, sapphires are often heat treated to enhance their color. This 
treatment is permanent and does not create special care requirements. 
An untreated sapphire, however, could be considered more valuable than 
a heat-treated stone, and absent disclosure consumers may be deceived 
as to the value of the stone. Further, new technologies for treating 
gemstones are continually developing that might affect the value of the 
gemstone, similar to how laser-drilling affects the value of diamonds. 
Accordingly, the Commission asked whether Sec. 23.22 of the Jewelry 
Guides should be revised to require disclosure of permanent treatments 
that do not require special care, if the treatment has a significant 
effect on the stone's value and a consumer, acting reasonably under the 
circumstances, could not ascertain that the stone has been treated.
    Specifically, the FRN asked: ``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?'' The FRN 
also asked whether industry policy provides for disclosure of permanent 
gemstone treatments that do not create special care requirements. 
Finally, the FRN asked: ``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 any way?''

B. Summary of the Comments

    The comments state that currently it is not a widespread industry 
policy to disclose permanent gemstone treatments that do not create 
special care requirements.\25\ But, the comments also contend that 
requiring disclosure of these treatments would not inhibit advertising 
or create additional costs for retailers in most instances.\26\ Thus, 
overall, the comments support amending the Guides to provide for 
disclosure of permanent gemstone treatments.\27\
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    \25\ The following comments state that current industry policy 
is not to disclose. ISA (014); NAJA (016); Gaenzle (017); Matlins 
(001A); CJAO (005A). The following comments recommend disclosure. 
JVC-1 (006A); Zale (00A); AGTA-1 (015A).
    \26\ ISA (014); NAJA (016); Matlins (001A); Kapoor (004A); JVC-1 
(006A); Zale (007A); AGTA-1 (015A).
    \27\ See DMIA (002); Lange (003); Chuck (004); Adamas (005); 
DiamondDude (006); Shrake (013); ISA (014); JIC-1 (015); Gaenzle 
(017); JIC-2 (018); Miranda (020); Matlins (001A); CJAO (005A); JVC-
1 (006A); Zale (007A); Bothra (008A); Baum (011A); GE-1 (014A); 
AGTA-1 (015A); NRF (017A); AIS (018A).
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    Eight comments discussed whether there is 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. All eight assert that 
a treated gemstone is less valuable than a untreated gemstone even if 
the treatment is permanent and does not create special care 
requirements.\28\
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    \28\ Matlins (001A); Adamas (005); NAJA (016); ISA (014); CJAO 
(005A); JVC-1 (006A); Zale (007A); AGTA-1 (015A).
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    A number of comments also address the two proposed conditions that 
would trigger a disclosure: (1) The treatment has a significant effect 
on the stone's value; and, (2) a consumer, acting reasonably under the 
circumstances, could not ascertain that the stone has been treated. 
These proposed conditions generated significant comment, as discussed 
below.

C. Analysis of Comments

    Based on the record and for the same reasons that the Commission is 
now requiring laser drilling to be disclosed, the Commission has 
determined that the Guides should require disclosure of permanent 
gemstone treatments that significantly affect a stone's value. As one 
comment explains ``[t]here is definitely a disparity in price between 
natural unenhanced gemstones, and those which are enhanced. And it does 
not matter whether the treatment is permanent or not, or whether 
special care is required * * * Treated gems are less rare than non-
treated gems, and cost less.''\29\ For example, blue sapphires are 
often heat treated to enhance their color. This treatment is permanent 
and the stone does not require special care. If one compared two 
sapphires of the same size and clarity but one obtained its rich, blue 
color naturally and the other from heat treatment, the treated sapphire 
would be worth less.\30\ In fact,

[[Page 78741]]

there are some retailers that specialize in untreated stones and charge 
a premium for these products.\31\
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    \29\ Matlins (001A); see also Adamas (005) (``[t]reatments 
applied to gemstones significantly effect the cost and ultimate 
value''); NAJA (016) (``[t]here is a disparity in rarity of treated 
vs. natural gemstones and therefore almost always some price 
differential exists.'').
    \30\ Matlins (001A). This commenter explains, however, that 
untreated sapphires often do not sell for a higher price than 
treated stones. Some retailers do not charge a premium for the 
naturally colored stones because in order to explain the price 
differential the retailer would have to disclose that the other 
stones were treated.
    \31\ Id.
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1. Conditions Triggering Disclosure
    a. Significant Effect on Value. Although the record establishes 
that there is a disparity in value between treated and untreated 
gemstones, failure to disclose the treatment is deceptive only if the 
omission is material to consumers. Thus, the purpose of the first 
condition--that the treatment have a significant effect on value--was 
to trigger disclosure in circumstances where the information would be 
important to consumers and not where there were small value changes 
that were not likely to affect consumers' purchasing decisions. In 
addition, the Commission did not intend for the Guides to require 
disclosure of routine processing treatments, such as cutting and 
polishing, that all stones undergo that enhance their value. The 
comments, however, question whether conditioning disclosure upon 
whether the treatment has an effect on value is necessary and whether 
the term ``significant'' should modify this condition.
    First, a few comments assert that the phrase ``effect on value'' is 
unclear. The comments note that the proposed language does not indicate 
what kind of effect on value triggers disclosure.\32\ They note that 
treatments have two effects on value--first, the stone is more valuable 
than it was before it was treated; second, the stone may be less 
valuable than a similar untreated stone. As explained above, the 
Commission is concerned with the effect on value that is material to a 
consumer's purchasing decision, i.e., whether the treated stone is less 
valuable than a comparable untreated stone.

    \32\ NRF (017A); Zale (007A); AIS (018A).
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    Another commenter, AGTA, opposes tying the treatment disclosure to 
value, stating:
    All treatments, permanent or otherwise, are performed to 
increase the value of untreated material. To propose otherwise 
implies that when comparing two gemstones with similar 
characteristics of quality, one treated and another untreated, they 
should be considered of equal value. This goes directly against the 
fundamental property of ``rarity'' with respect to untreated 
gemstones.\33\

    \33\ AGTA-2 (022A) (emphasis in original).
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Thus, AGTA instead proposes that all treatments to gemstones be 
disclosed regardless of permanence, special care, or their effect on 
value.
    The Commission finds, however, that failure to disclose a gemstone 
treatment is deceptive only if absent disclosure consumers would 
falsely believe that the treated gemstone is as valuable as a similar 
untreated stone. Any treatment that in fact affects the value of a 
gemstone in a way that is material to consumers must be disclosed under 
the revised Guide.\34\
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    \34\ If, in fact, all treatments have such an effect on the 
value of gemstones, then all treatments will need to be disclosed. 
There may, however, be some exceptions, such as the treatments to 
very small gemstones in jewelry pieces, which is discussed below.
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    Second, with respect to the term ``significant,'' several comments 
state that the term ``significant'' does not provide sufficient 
guidance as to when disclosure is required.\35\ One comment explains 
that the word ``significant'' could create a loophole for unethical 
sellers to avoid disclosure by arguing that the treatment's effect on 
the value of the stone was not significant.\36\ The Commission 
concludes that the term ``significant'' is necessary to limit the 
disclosure requirement to instances where the failure to disclose 
treatment information would be deceptive. Disclosure of permanent 
treatments is necessary only where the treatment's effect on value is 
likely to affect a consumer's purchasing decision.
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    \35\ Gaenzle (017); JVC-1 (006A); NRF (017A); GE-2 (020A).
    \36\ GE-2 (020A).
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    The Commission often uses the term ``significant'' to establish 
materiality, that is claims or omissions that are likely to affect 
purchasing decisions. For example, the Commission's Deception Policy 
Statement explains that the Commission considers certain categories of 
information presumptively material, including claims that 
``significantly involve health, safety, or other areas with which the 
reasonable consumer would be concerned,'' including a claim that 
``concerns the purpose, safety, efficacy or cost of the product or 
service.'' \37\ Thus, the inclusion of the word ``significant'' is 
meant to provide a practical, common sense limitation on when 
disclosures should be made.
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    \37\ Deception Policy Statement, 103 F.T.C. at 182-83 (emphasis 
added, footnotes omitted). In addition, prior orders and guides also 
tie disclosures to situations involving significance. For example, 
an order against a pharmaceutical company prohibits the company from 
representing that ``any such [mouthwash] product will have any 
significant beneficial effect on the symptoms of sore throats.'' 
Warner-Lambert Co., 92 F.T.C. 191, 192 (1978) (emphasis added). 
Similarly, the Commission's Guides for the Use of Environmental 
Marketing Claims provide ``[i]f an incidental component 
significantly limits the ability to recycle a product or package, a 
claim of recyclability would be deceptive.'' 16 CFR 260.7(d) 
(emphasis added).
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    The Commission also acknowledges that the value of the gemstone in 
a piece of jewelry may not be determinative of the price. Factors such 
as the workmanship of the piece and overall beauty undoubtedly affect 
the price charged for the product. Holding these factors constant, 
however, retailers should evaluate whether the gemstone treatment makes 
the product less valuable than it would be if it contained an untreated 
stone. The difference in value as a result of a gemstone treatment, 
although not large from the seller's point of view, might be 
significant to consumers who might reasonably expect to pay less for a 
product containing a treated stone or would choose a piece with an 
untreated stone if the treatment were disclosed. The consumer's point 
of view is the relevant viewpoint from which to analyze the necessity 
for disclosure.\38\
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    \38\ In evaluating whether a treatment should be disclosed 
retailers could ask themselves how a consumer would react if he 
discovers this treatment after he leaves the store (for example, 
when he takes the stone to an appraiser or attempts to sell the 
piece).
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    b. Consumer Acting Reasonably under the Circumstances. The comments 
also expressed concern regarding the second condition that triggered 
disclosure in the Commission's proposed changes to Sec. 23.22--i.e., a 
consumer, acting reasonably under the circumstances, could not 
ascertain that the stone has been treated. This condition was designed 
to incorporate the concept of ``reasonableness,'' which is an element 
of deception.\39\ The test is whether it is reasonable for consumers to 
believe that two seemingly identical stones are identical or very 
comparable in value based either on the ad, the stones themselves or 
the seller's representation, about other characteristics of the stone 
(e.g., carat weight, cut and color).\40\
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    \39\ In addition, it was designed to determine alternatively 
whether an element of unfairness had been met.
    \40\ Deception Policy Statement, 103 F.T.C. at 174.
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    Based on the comments, the Commission concludes that consumers 
acting reasonably under the circumstances, in the absence of 
disclosure, could believe (incorrectly) that the treated stone and 
untreated stone have the same or nearly the same value. Thus, the 
Commission has determined that failure to disclose a gemstone treatment 
that has a significant effect on the value of the stone may mislead 
reasonable consumers as to the value of the stone and has revised the 
guide to require

[[Page 78742]]

disclosure of such treatments. Accordingly, it is unnecessary to 
consider further whether a consumer could avoid injury by taking 
affirmative action, such as seeking an independent appraisal, before 
purchasing the product or to limit the disclosure requirement to 
situations where the consumer could not otherwise learn that the stone 
had been treated.\41\
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    \41\ Because the omission or any implied misrepresentations may 
mislead consumers, the Commission has concluded that it is not 
necessary to determine separately whether the practice is unfair.
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2. Additional Issues Raised in the Comments
    Although the comments support revising the Guides to provide for 
disclosure of permanent gemstone treatments that significantly affect 
the value of the gemstone, the comments raise two additional concerns 
regarding when disclosure is necessary. These concerns relate to 
disclosure of undetectable treatments and treatments to very small 
gemstones.
    a. Undetectable Treatments. Several comments note that some 
gemstone treatments are not detectable, even by experts. These comments 
express concern that requiring disclosure of any gemstone treatment 
that has a significant effect on the stone's value would put retailers 
at a high risk for lawsuits for failing to disclose treatments even 
when the seller did not know or have reason to know about the 
treatments.\42\ This concern stems largely from the new GE diamond 
treatment that is performed on diamonds with inferior color (e.g., 
brown or very yellow diamonds), which permanently and greatly improves 
their color without any need for special care.\43\ Currently, this 
treatment is not detectable.\44\ Since the treatment only recently 
became available, it is unclear whether it will affect a diamond's 
value. Some industry groups have opined that the treatment will affect 
a diamond's value and, therefore, disclosure would be required under 
the proposed Guides.\45\ Because the treatment is undetectable, 
however, these comments propose adding to Sec. 23.22 a phrase that 
permanent treatments should be disclosed ``if said treatments are known 
or reasonably should have been known to the seller at the time of 
sale.'' \46\
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    \42\ JVC-1 (006A); Zale (007A); NRF (017A).
    \43\ See, e.g., JVC-1 (006A); AIS (018A); Adamas (005); 
DiamondDude (006); Matlins (001A). In fact, the introduction of this 
treatment was the impetus for many comments' support for disclosure 
of permanent gemstone treatments that do not create special care 
requirements.
    \44\ GE-1 (014A).
    \45\ E.g., AIS (018A); JVC-1 (006A). General Electric 
voluntarily is disclosing the treatment right now. GE-1 (014A).
    \46\ JVC-1 (006A); accord Zale (007A); NRF (017A).
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    Adding such a phrase, however, might provide unscrupulous marketers 
with an opportunity to avoid disclosure by arguing that they did not 
know the gemstone had been treated. AGTA strongly opposes the addition 
of this language, noting such language would ``leave loopholes in 
gemstone enhancement disclosure guidelines that would ultimately be 
damaging to our trade.'' \47\ AGTA publishes a manual on gemstone 
treatments that advises that if a gemstone falls into a group that is 
routinely enhanced, the seller must assume that it has been enhanced, 
even if he is unaware of whether the treatment has been performed or 
not, and disclose the treatment.\48\
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    \47\ AGTA-2 (022A).
    \48\ Id.
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    The Commission has decided not to add the limiting phrase because 
all members of the jewelry industry, not just retailers, have an 
obligation to disclose treatments to others in the line of distribution 
and a duty to make reasonable inquiries about whether the products they 
are purchasing have been treated. At the same time, the Commission is 
mindful that responsible retailers may be misled about whether the 
gemstones they have purchased have been treated or not. The 
Commission's ability and willingness to exercise prosecutorial 
discretion in such situations should alleviate retailers' concerns that 
they unreasonably would be held accountable for others' illegal 
conduct. To address the concern raised in the comments, however, the 
Commission has added a note to Sec. 23.22 reiterating that the 
disclosures outlined in this section are applicable to sellers at every 
level of trade, as defined in Sec. 23.0(b) of these Guides.\49\
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    \49\ Several comments indicated that the Guides should specify 
that the disclosure provisions apply to all levels of trade.
---------------------------------------------------------------------------

    b. Treatments to Small Gemstones. Several comments relate an 
additional concern regarding treatments to very small gemstones, such 
as stones weighing less than .10 carat.\50\ These comments explain that 
very small stones generally are sold mounted in jewelry, not loose. 
Efforts to inspect the stones individually to detect treatments would 
be very expensive and would likely result in higher consumer 
prices.\51\ In addition, the detection efforts might destroy the 
piece.\52\ The comments further state that the price of the piece is 
not based on the value of the individual gemstones but on the jewelry 
piece as a whole. These comments request that the Commission craft an 
exemption to the disclosure provisions for very small stones.\53\
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    \50\ Zale (007A); NRF (017A); Indenbaum (009).
    \51\ One retailer stated that it could not continue to sell 
these types of pieces if disclosure were required because the cost 
would be so prohibitive. Zale (007A).
    \52\ Zale (007A).
    \53\ Zale (007A); NRF (017A); Indenbaum (009).
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    The Commission has determined that an exemption is not necessary to 
address gemstone disclosures for very small stones. If, as the comments 
state, the price of the piece is not based on the value of each 
individual gemstone, a permanent gemstone treatment performed on some 
or all of the stones may not significantly affect the value of a 
jewelry product containing very small gemstones. Thus, disclosure may 
not be required under the revised Guide.
    The Guides, however, already require, regardless of the stone's 
size, that non-permanent gemstone treatments or treatments requiring 
special care still be disclosed. When the Commission revised the Guides 
to require disclosure of these treatments, it did not exempt very small 
gemstones. The Commission explained in 1996 that ``if consumers are 
unaware of the non-permanency of a treatment or the special care 
requirements associated with a treatment, the gemstone may not meet 
their expectations, if the color fades or inclusions appear, etc.''\54\ 
This reasoning applies to all jewelry products regardless of the size 
of the gemstones contained in the product.
---------------------------------------------------------------------------

    \54\ 61 FR 27207.
---------------------------------------------------------------------------

    In addition, individual inspection of each stone is not necessary 
to disclose gemstone treatments. For example, if a jewelry piece 
contains very small emeralds, the retailer could disclose that the 
emeralds have likely been oiled and disclose that the treatment is not 
permanent and the special care requirements necessary to care for oiled 
emeralds. It is prudent and appropriate to disclose gemstone 
treatments, rather than remain silent, where there is a possibility 
that the stones have been treated.
    The Commission is aware of several large retailers that currently 
employ this practice. For instance, some retailers selling jewelry on 
the Internet include a general disclosure on their websites such as: 
``Gemstone products are often treated to enhance their beauty. Some of 
these treatments are not permanent or the stone requires special care. 
Click here for more information about gemstone treatments.'' The link 
then provides information about gemstone treatments, including whether 
the

[[Page 78743]]

treatments are permanent or require any special care to maintain. In 
addition, as required by the Guides, these disclosures are provided 
prior to consummation of the sale. Other large retailers use counter 
placards that are clearly and conspicuously placed above display cases 
showcasing gemstone products. The placards include general disclosures 
about gemstone treatments and direct consumers to ask a salesperson for 
more information. Pamphlets providing information about gemstone 
treatments are available on the counter near the placards. These 
methods of gemstone treatment disclosure comply with the Jewelry Guides 
and can be used to disclose gemstone treatments that significantly 
affect the value of gemstones.

V. Revisions to the Guides

    As noted above, the Commission is revising the Jewelry Guides to 
require disclosure of laser-drilling and other permanent gemstone 
treatments that significantly affect the value of the gemstone. The 
Commission has determined to combine Secs. 23.13 and 23.22. The first 
section addresses the disclosure of diamond treatments and the second 
addresses gemstone treatments. The current sections, and the originally 
proposed revisions, are not identical. Many comments requested that the 
Commission make the two sections consistent. The Commission has 
determined that there is no reason to treat the disclosure of 
treatments to diamonds and to gemstones differently. Therefore, the 
Commission is combining the two sections. Section 23.13, in the 
diamonds section of the Guides, will direct readers to Sec. 23.22, 
which will address treatments to all gemstones, including diamonds.
    Section 23.22 of the Guides is revised to include three sub-
paragraphs addressing three categories of gemstone treatments. Section 
23.22(a) require disclosure of non-permanent gemstone treatments and 
the fact that the treatment is not permanent. Section 23.22(b) requires 
disclosure of treatments that create special care requirements for the 
gemstone and advises sellers to disclose what those requirements are. 
Section 23.22(c) requires disclosure of gemstone treatments that 
significantly affect a stone's value.
    Previously, the sections listed the various treatments that should 
be disclosed. The comments indicate that the jewelry industry is 
continually developing new treatments.\55\ Thus, any examples of 
treatments included in the Guides could be out-of-date fairly quickly. 
Therefore, the Commission has determined that the Guides would be more 
useful to the industry if the treatment disclosure provisions provide 
general guidance that could be applied to whatever treatments are being 
used. Information regarding the application of the Guides to specific 
treatments will be addressed in the Commission's consumer and business 
education materials.\56\ Finally, as noted above, revised Sec. 23.22 
contains a note stating that the disclosure provisions apply to all 
levels of trade.
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    \55\ E.g., Matlins (001A); AIS (018A).
    \56\ For at least 20 years, the Commission has published a 
consumer education pamphlet describing the Jewelry Guides and 
advising consumers on jewelry industry terms and practices. This 
publication has been revised several times over the years to address 
developments in the industry. In 1998, the Commission published a 
business guide to assist business in complying with the Guides. 
These publications, ``All That Glitters: How to Buy Jewelry,'' and 
the business guide, ``In the Loupe: Advertising Diamonds, Gemstones 
and Pearls,'' are available by contacting the FTC Consumer Response 
Center, 600 Pennsylvania Avenue, NW, Washington, DC 20580, (877) 
FTC-HELP or from the FTC website at www.ftc.gov>.
    The Commission also notes that for at least the past 10 years, 
AGTA has published a Gemstone Information Manual, which details 
gemstone enhancements and provides information regarding the 
permanency of treatments and special care requirements. This manual 
is updated frequently and can respond to industry trends more 
rapidly and with greater precision than the FTC Jewelry Guides. The 
industry is encouraged to use this and other industry resources in 
conjunction with the Commission's Jewelry Guides to avoid unfair or 
deceptive trade practices.
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List of Subjects in 16 CFR Part 23

    Advertising, Jewelry, Labeling, and Trade practices.

    For the reasons set forth in the preamble, the Federal Trade 
Commission amends Chapter I of Title 16 of the Code of Federal 
Regulations as follows:

PART 23--GUIDES FOR THE JEWELRY, PRECIOUS METALS, AND PEWTER 
INDUSTRIES.

    1. The authority citation for part 23 continues to read as follows:

    Authority: Sec. 6, 5, 38 Stat. 721, 719; 15 U.S.C. 46, 45.

    2. Revise Sec. 23.13 to read as follows:


Sec. 23.13  Disclosure of treatments to diamonds

    A diamond is a gemstone product. Treatments to diamonds should be 
disclosed in the manner prescribed in Sec. 23.22 of these guides, 
Disclosure of treatments to gemstones.

    3. Revise Sec. 23.22 to read as follows:


Sec. 23.22  Disclosure of treatments to gemstones.

    It is unfair or deceptive to fail to disclose that a gemstone has 
been treated if:
    (a) The treatment is not permanent. The seller should disclose that 
the gemstone has been treated and that the treatment is or may not be 
permanent;
    (b) The treatment creates special care requirements for the 
gemstone. The seller should disclose that the gemstone has been treated 
and has special care requirements. It is also recommended that the 
seller disclose the special care requirements to the purchaser;
    (c) The treatment has a significant effect on the stone's value. 
The seller should disclose that the gemstone has been treated.

    Note to Sec. 23.22: The disclosures outlined in this section are 
applicable to sellers at every level of trade, as defined in 
Sec. 23.0(b) of these Guides, and they may be made at the point of 
sale prior to sale; except that where a jewelry product can be 
purchased without personally viewing the product, (e.g., direct mail 
catalogs, online services, televised shopping programs) disclosure 
should be made in the solicitation for or description of the 
product.


    By direction of the Commission.
Donald S. Clark,
Secretary.

    Note: The following appendix will not appear in the Code of 
Federal Regulations.

Appendix A

----------------------------------------------------------------------------------------------------------------
          Abbreviation                          Number                                Commenter
----------------------------------------------------------------------------------------------------------------
Gross...........................  001                                Gross Diamond Corporation.
DMIA............................  002                                Diamond Manufacturers & Importers
                                                                      Association of America.
Lange...........................  003                                Erik Lange.
Chuck...........................  004                                Chuck [email protected]>.
Adamas..........................  005                                Adamas Gemological Laboratory.
Diamond Dude....................  006                                Diamond Dude.
Sherman.........................  007                                Alan Sherman.

[[Page 78744]]

 
Rist............................  008                                John Rist.
Indenbaum.......................  009                                Arthur Indenbaum.
Brown...........................  010                                Grahame Brown.
Sagan...........................  011                                Van Sagan.
Park City.......................  012                                Park City Jewelers.
Shrake..........................  013                                Jim Shrake.
ISA.............................  014                                International Society of Appraisers.
JIC-1...........................  015                                Jewelry Information Center comment 1.
NAJA............................  016                                The National Association of Jewelry
                                                                      Appraisers.
Gaenzle.........................  017                                Bonnie Burton Gaenzle.
JIC-2...........................  018                                Jewelry Information Center comment 2.
Jensen..........................  019                                Karen Jensen.
Miranda.........................  020                                Jose Miranda.
Themelis........................  021                                Ted Themelis.
Matlins.........................  001A                               Antoinette Leonard Matlins.
Rapaport........................  002A (& 010A)                      Martin Rapaport.
Green...........................  003A                               Green Brothers LLC.
Kapoor..........................  004A (& 009A)                      Amit Kapoor.
CJAO............................  005A (& 0012A)                     CJAO.
JVC-1...........................  006A                               Jewelers Vigilance Committee comment 1.
Zale............................  007A                               Zale Corporation.
Bothra..........................  008A                               Dharmesh Bothra.
Baum............................  011A                               Baum Diamonds.
Dua.............................  013A                               Deep Singh Dua.
GE-1............................  014A                               General Electric comment 1.
AGTA-1..........................  015A                               American Gem Trade Association comment 1.
Mason-Kay.......................  016A                               Mason-Kay, Inc.
NRF.............................  017A                               National Retail Federation.
AIS.............................  018A                               Appraisal Information Services.
JVC-2...........................  019A                               Jewelers Vigilance Committee comment 2.
GE-2............................  020A                               General Electric comment 2.
Real Gems.......................  021A                               Real Gems, Inc.
AGTA-2..........................  022A                               American Gem Trade Association comment 2.
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[FR Doc. 00-31776 Filed 12-14-00; 8:45 am]
BILLING CODE 6750-01-P