Legal Aspects of Grading, Part 1

The Federal Trade Commission (FTC) requires jewelers to truthfully and accurately represent the grading system used to determine a diamond's quality. You may have heard different views expressed in the news regarding various grading standards and their meanings. Diamond quality grading is central to the integrity of the jewelry and diamond industry. It cuts straight to its ability to maintain confidence in the diamonds sold by jewelers.

In December 2014, the Jewelers Vigilance Committee sent an update on FTC guidelines to its members. This article is a summary of that update. The International Gem Society (IGS) continues to be inspired by the JVC's meaningful and critical work to ensure fair and high standards in the jewelry and diamond trade.

In brief, be aware of the basic legal principles relevant to grading reports and their representations of diamond grades.

Diamond Quality Grade Reports and Liability

Jewelers must be careful about the grading reports they use in connection with a sale. If jewelers are aware the reports contain unsupported claims about the grade or diamond quality, or if the grading system isn't disclosed, they could be held liable. If the grades assigned aren't truthful and accurate in compliance with FTC guidance, or the grading system not disclosed, there is a risk of engaging in a deceptive trade practice. This also applies to all representations made about industry products (as further explained below).

Here, we'll discuss the FTC rules, along with several others that govern claims about diamond grades.

Disclosing the Identity of the Grading System

FTC guides require that if a representation is made about grade, then the identity of the grading system must be disclosed.

According to the FTC Jewelry Guides, a representation that a stone is a specific grade is deceptive if the identity of the grading system used is not disclosed (section 23.1, note). This rule ensures that buyers know the basis for an assigned grade. This then allows them to make an informed comparison of various qualities of diamonds as disclosed on grading reports. Obviously, the rule is completely and thoroughly undercut if a lab discloses a particular grading system but uses the grades in a manner inconsistent with industry norms for that system.

The Reasonable Buyer Perspective

A reasonable buyer could conclude that grades have standard meanings.

The FTC analyzes product claims from the perspective of a reasonable buyer.

For example, a reasonable buyer of diamonds often views various grading reports issued by various labs to compare diamonds. Like any product claim, representations of diamond quality grades made via grading reports are reviewed in their entirety. This includes text and visuals on the report itself. Reports from many labs typically include grading scales that describe the range of designations for diamond color and clarity. These scales often use similar letter grades, such as D-Z for color and F-I3 for clarity.

Since labs often use this same range of letters and terms, a reasonable buyer could conclude that grading labs whose reports employ that system use these designations uniformly. (Subject to human error, see below). A reasonable buyer could also conclude from these commonly used designations that graders employ uniform methodologies in assigning those grades. This is especially so when a report discloses nothing additional about how a particular lab implements the grading system. Thus, a reasonable buyer could justifiably reach the conclusion that grading is based on the application of uniform standards.

Some grading reports contain references to conformity and standardization bodies, such as the International Organization for Standardization (ISO) and IQNet. However, the reports provide no additional information explaining those references. Such references, without any further explanation, could further lead a reader to believe that grading designations are standardized.

Diamond Grading Tolerance and Misrepresentation

It is unfair and deceptive to misrepresent the grade of a diamond.

Diamond quality grading has a subjective element. For this reason, industry custom and practice allows a one-grade tolerance. This acknowledges that, while the industry has accepted norms, a one-grade deviation from that norm can happen even with competent staff and widely available industry-standard equipment. A court of law reviewing a false claim related to diamond grading will likely rely on these industry norms.

Deviations That Exceed Accepted Tolerance

Routine production of reports that exceed accepted tolerance likely indicates a lab engaged in a pattern and practice of deception. This is particularly notable if the deviations always fall on the high side. Such practices expose the lab (and sellers who use these lab reports) to government enforcement action as well as consumer class actions or competitor Lanham Act lawsuits. This also subjects the entire buying public to a crisis in confidence. A pattern and practice of inflating diamond grades (or using reports that do so in a sale) constitute a deceptive trade practice in violation of the FTC Guides. Poorly explained disclosures can't correct false claims about diamond grades with no basis in industry norms.

Disclosing Deviations from Industry Standards

On the other hand, in other circumstances, clear and conspicuous disclosure will prevent deception. If a lab uses a grading method that deviates in some respect from the industry norm, and if the method often results in different grades, the report should disclose this, so that a reasonable buyer can make an informed purchase. The disclosure should include a description of the practice used. In addition, it should state the fact that the practice frequently results in different color grades than standard methods.

To avoid deception, if a particular lab uses standard grades but implements those grades in a manner different from routine practice, it should clearly and conspicuously disclose this in understandable language in its report. This will inform the consumer of what the assignment of a particular grade for color and clarity means.

Grading Reports are not Certificates

Grading reports should not be called certificates.

Diamond quality grading reports aren't certified. "Certification" typically refers to the confirmation of certain characteristics by an external review. Most diamond grading reports don't receive an external review or certification by an independent body. Therefore, identifying them as "certificates" is incorrect. Refer to these documents as simply "grading reports."

Maintaining Confidence in Diamond Products

The FTC guides and the laws that enforce them seek to prevent deception. A grossly inflated diamond grade isn't mere "puffery," an accepted advertising practice. It is deceptive.

By adhering to all relevant laws, graders and sellers can protect themselves from liability. In addition, they will foster a level playing field for everyone in the industry. This maintains confidence in jewelers' products.

Please contact the JVC with questions regarding diamond grading or visit their website for more information about legal compliance.

JewelersVigilanceCommittee

Our members receive free education of the complex laws that apply to the manufacturing, advertising and sale of jewelry. We are available to answer questions about how to apply those laws to your every day business practices. The JVC provides up-to-the-minute information about changes in the national and local laws that apply to the jewelry business. jvclegal.org.

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