The form and contents of the proposed GIA certificate on synthetic diamonds was a hotly debated issue at this week’s GIA Symposium in San Diego. The discussion squarely reflects perceived economic interests – and even though every side likes to talk about “protecting consumer confidence”, none of the speakers had done any serious research on what the consumer prefers. Some retailers stressed that a different nomenclature for synthetics would be confusing, but those representing natural diamonds were adamant that different wordings were absolutely imperative.

            The “hottest” part of the discussion was the use of the word “synthetics”, the alternative terms “man-made” or “laboratory grown”, or, the more controversial “cultured”. [A remark by a female divorced senior GIA executive at a cocktail party gave the discussion a feminist twist: “I purchase my own diamond jewelry. I would never buy “man-made”, but would go for “laboratory grown”. That is as close we got to a consumer reaction…]

            What concerned me, however, was the culture of the debate, far beyond the session at the GIA symposium. A leading producer of synthetics has put the Gemological Institute of America on notice that the GIA may be in violation of U.S. anti-trust laws, specifically the Sherman and Clayton Acts for colluding with the natural industry to get language accepted for the GIA certificates which would make the synthetics certificate a marketing tool for the natural diamond industry against the synthetics producers.

            In the public’s mind, it is argued, the word “synthetics” is perceived as “fake”. Even if within the industry most of us understand the meaning of “synthetics”, the consumer, whom we all want to protect, is not part of the debate. The consumer considers it fake. Therefore, the synthetic producers are fighting for alternative words, and their preferred word is “cultured”. Gemesis, which has been marketing “cultured diamonds” for quite a while, has never been advised by the Federal Trade Commission, which is the ultimate legal authority in the U.S. on what wording is allowed in the marketing of synthetics to the consumer, of any objections to that term.

            The commercial and financial stakes in this debate are enormous. Martin Rapaport, in an eloquent and characteristically entertaining stand-up presentation, introduced another angle in the synthetics debate: “All the suckers in the natural diamond industry are working hard to get higher margins and lift prices so that De Beers can make more money. At least with synthetics, you’ll be making money for yourself.” That viewpoint ignores the likelihood that at some point in the future De Beers itself will market gem quality synthetics. It is commercially inconceivable that the company that possesses the very best (CVD) synthetic production technologies and has the greatest marketing experience would allow a loss of market share in a new emerging market niche. Therefore, ultimately, the current dominancy of De Beers in natural diamonds may repeat itself in a synthetic gem quality diamond environment, but that is not on the cards today or tomorrow.

            Today, the natural diamond producers and downstream industry are clearly out to get the synthetics producers – and the GIA and other labs, but especially the GIA – to use words which will protect the natural diamond business.

            What has prompted the accusations against the GIA to possibly be in violation of anti-trust laws are the published comments by GIA Chairman Ralph Destino to the effect that the GIA may now control the nomenclature of companies producing and wishing to grade man-made diamonds. It is argued by the complainant that “this is not a proper function of the GIA, a not-for-profit institution; it is not supposed to be a tool of the natural diamond industry.” Destino’s statements are viewed as placating and benefiting the competitive concerns of the natural diamond merchants, as represented by various trade organizations. Needless to say that these accusations have been totally rejected by the GIA. “In our synthetics certificate, the names “man-made” and “laboratory grown” are clearly mentioned,” says GIA Chairman Ralph Destino. “If stones submitted for certification have been inscribed on the girdle with a word (man-made, synthetics, cultured, or whatever) which is allowed by the FTC, we will respect that and have no problem with it,” stresses Destino.

            The charge that he “controls the nomenclature” greatly upset Chairman Destino. “In the past six months I have engaged in an unprecedented dialogue with all our stakeholders. We have changed our image – by our actions. We are not arrogant. We listen, we explain, and, again, we listen. At the end of the day, we are a gemological research organization and we decide on how to express our findings on a grading report,” he stressed to me. Destino finds himself between a rock and a hard space. He wants to listen to the trade and industry, he wants the dialogue, and when he actually implements what he learned from stakeholders, he risks accusations of collusion. Where is the line between “dialogue” and “collusion”?

Trade Unites to Get GIA to Adopt Favorable Wording

            What may trigger a reaction by some of the synthetic producers is the “Memorandum of Understanding” (dated July 26, 2006) between CIBJO, IDMA, IDC and the WFDB, in which these industry bodies agree “that there is a pressing need for a coordinated approach to the grading of diamonds, treated diamonds and synthetic diamonds. …. These organizations, which include all relevant factors and participants in the diamond and jewelry sectors, will cooperate in their efforts to arrive at guidelines for dealing, handling, and describing diamonds, as well as synthetic diamonds and treated diamonds.”

            These parties represent the industry and trade of natural diamonds. They do not represent consumers. There is no doubt that the aforementioned trade organizations and others are making concerted efforts to raise significant and material barriers, in the hope that it might avoid, delay or even block man-made diamonds from reaching the consumers – taking away market share of the natural diamonds or reducing their value. These industry organizations are protecting above all the interest of their members – they do what a trade association is supposed to do. Something would be amiss if they would act otherwise.

            But the culture of the debate may not stray into illegitimate directions. Some diamond bourses prohibit the trade of synthetics on their bourse floor and clearly state a position that synthetics are not diamonds. They are a different product. They have nothing to do with the diamond industry. An eloquent spokesman for the natural diamond industry, Honorary President for Life of the World Federation of Diamond Bourses Shmuel Schnitzer, said that the industry had already compromised: there are two different products, he said, “diamonds” and “synthetics”. The fact that we now allow the term “synthetic diamonds” already represents a great compromise.”

            From a legal perspective: what “rights” does the natural diamond business have to determine the marketing terms of an entirely different product? To illustrate this clearly: what right do the manufacturers of shoes have to determine the marketing terms for pantyhose? Both items may compete for similar body space coverage – but they are different products.

What is in the Best Interest of the Consumer?

            The most important view that should guide the GIA is what is “best for the consumer”. The GIA hasn’t done the research. It hasn’t devoted resources to really get the view of its most important stakeholders: those who it is supposed to serve.

            The GIA has no members (any more). It is a non-profit organization championing a cause; it has a mission. The GIA's self-imposed and declared mission is to ensure the public trust in gems and jewelry by upholding the highest standards of integrity, academics, science, and professionalism through education, research, laboratory services, and instrument development. Many of our previous articles about the GIA focused on governance issues. We addressed the issue of undue influences by donors, by members, etc. and – we believe – the GIA is more focused today than at any time in recent years on its central purpose: to protect the public’s trust in gems and jewelry.

            The GIA should listen to everyone but, at the end of the day, must base the final text of its synthetic certificate on (1) terminology allowed by the FTC and (2) terminology that will protect the public’s trust in the jewelry business. Moreover, it should act carefully not to be drawn into a court case that might question the integrity of the decision-making process.

            Destino stressed to me that “the industry must understand that through certificates the GIA gives an opinion on the stones in a professional manner. We are issuing a report. We are NOT issuing a “marketing tool” and the fact that the synthetics certificate also mentions some of the other words (man-made, laboratory-grown) should underscore that.”

            However, if the resulting “synthetics certificates” becomes a pure marketing tool for natural diamonds, something may have gone awry.

            Many market participants believe that the words “cultured”, “man-made”, “synthetic” or “laboratory grown” are all well understood by the consumer. De Beers disagrees. Says spokeswoman Lynette Hori “we at De Beers are focused on consumer confidence and, as such, we are determined that consumers understand exactly what product they are buying. 'Cultured diamonds' is not understood and all our research confirms this. Consumers should understand that what they are buying is not something that is rare and unique, but something that is mass produced in a factory.”

            Lynette is an eloquent corporate spokesman. However, the GIA cannot rely on “research findings” by a clearly interested party. The GIA must commission its own research - and keep an eye on the law.

             There appears no legal prohibition to the use of “cultured”, certainly not in the United States. Yes, outside of the U.S., competition authorities (in conjunction with their respective national trade associations) in two countries have explicitly banned the use of “cultured” – Canada, because they feel they have a mining industry to protect, and Australia, because they have both a mining industry and a significant pearl farming industry. In the general scheme of things (as diamond consumer markets), those two countries don’t really matter but they could influence future decisions elsewhere.The U.S. Federal Trade Commission has investigated the uses of the word “cultured” (by Gemesis) and has found it to be fully compliant with current FTC Guidelines, or, to be more precise, it never ordered Gemesis not to use it.

            It is the view of De Beers that, in past rulings, the “FTC concluded that there was insufficient evidence concerning relevant consumer perceptions to explicitly allow the use of the term “cultured” with synthetic gemstones.” If this is so, why have none of the organizations pressuring the GIA not to use the word “cultured” actually petitioned or filed a complaint with the Federal Trade Commission? Why didn’t they do this? It has been conjectured that the natural industry has refrained from petitioning the FTC because it expects the FTC to formally approve the use of the word. [From a gemological perspective, the “method” by which diamonds are synthesized may also play a role here.]

            One speaker at a GIA symposium panel alluded to an Internet website where you click on the words “synthetic diamonds” and get into a site selling moissanite and all types of simulants. The question was asked: why no one complains about that questionable marketing practice?

FTC Recognizes the “Synthetic = Fake” Equation

            The FTC was persuaded in 1964 that, “the term ‘synthetic,’ as applied to gemstones, is misunderstood by some consumers to mean something fake or artificial.” While the Commission found that other qualifiers such as Laboratory Grown or [Manufacturer Name] Created more clearly communicated the nature of the stone, they decided to allow sellers to use synthetic despite the apparent ambiguity.

            “Interestingly enough,” recalls one of my sources, “in the submission made by the American Gem Laboratories during the consultation period leading up to the 1964 opinion, it was admitted that there is a “conscious desire to leave the consumer in a quandary regarding the difference between ‘synthetic’ and ‘imitation’ products… to reduce the capacity of the synthetic material manufacturer to penetrate the U.S. marketplace with their products.”

            Four decades later, many interested parties still seem to subscribe to that view. The FTC has not explicitly prohibited the use of the term “cultured” with synthetic gemstones. Here the FTC finds itself at odds with De Beers, which holds the view that a synthetic should be called a synthetic because it is synthesized by man. It should not be called “cultured” because an organism does not produce it. [For the record: De Beers does not object to the terms “man-made” or “laboratory grown”.]

            Those who desperately try to give the impression that there is something illegal or improper about the use of the word “cultured” have recently developed a new argument: a German court, in a case against Gemsmart GmbH (the distributor of Gemesis cultured diamonds) has forbidden the use of the word “zuchtdiamant” in Germany in the German language. There was no objection to the English term “cultured”. By the way, the German judgment reminds one of the Clinique precedent. Estee Lauder’s Clinique products are marketed as Clinique all over the world. Except in Germany. The German regulators said the brand name sounds “too medical to be appropriate for a cosmetics and skincare brand”.

            So, they prohibited the company from using their own trademark, and the company was forced to market their products under a different name, LINIQUE. The German ruling on “cultured diamonds” can hardly be expected to become a precedent for other countries. For the trade, what has relevancy is that the judge based his opinion also on CIBJO’s Blue Book, which provides the relevant nomenclature.

FTC vs. “Industry Governing Bodies”

            The synthetics producer that has put the GIA “on notice” may have been trying to do a “pre-emptive” strike – to avoid that the concerted efforts (outlined in the aforementioned Memorandum of Understanding) would lead to a situation in which the GIA would be forced, or cajoled, or persuaded, into accepting the “findings” of the concerted efforts – findings which, undoubtedly, will be favoring the position of the producers and dealers in natural diamonds.

            The GIA has already conducted one meeting with the signatories of the Memorandum of Understanding, underscoring the determination of the trade associations to influence the GIA – well before, we must add, all members of the Diamond Commission have been appointed or before any professional position has been formulated.

            In an odd way, the DTC’s Diamond Best Practice Principles (DBPP) complicate matters – especially for U.S. Sightholders -- as there may well be a conflict between FTC rules and the rules of “diamond industry bodies” to which Sightholders must comply. The DBPP, in its final clause, in Article 3, requires “full disclosure at all levels of the diamond distribution chain and, most importantly, to consumers, of all treatments to natural diamonds and with respect to wholly or partly synthetic stones and compliance with the rules, regulations, and guidelines published from time to time by the diamond industry's governing bodies.” [Emphasis added.] The synthetics clause is the only place in the DBPP where a reference is made to rather undefined and unspecified “diamond industry’s governing bodies.” That requirement is not included on any other item.

            The DBPP reference to “industry governing bodies” in the context of synthetics may become problematic for DTC Sightholders when there is a conflict between the position of CIBJO, “industry governing bodies”, and the FTC.

            It would have been “logical” if a reference had been made to applicable laws and regulations – they didn’t do that. As the FTC has no problem with the word “cultured” – the DBPP try to imply that “industry governing bodies” have a higher weight than governmental regulatory frameworks.

            That is not just a theoretical problem. At the GIA Symposium, a U.S. sightholder of the DTC stated that he is both a manufacturer and trader of natural and synthetic diamonds. [Someone suggested to me that this sightholder finds himself in a splendid position; if the DTC would drop him as a client, he might argue that he lost his sight privileges because of his trading in synthetics. Conflicts between DBPP and FTC would complicate such arguments.]

            To further complicate matters, CIBJO, which is an important signatory to the Memorandum of Understanding, has recently appointed a De Beers representative as Vice Chairman for its powerful Diamond Commission, that must draft the new version of the Blue Book that includes the nomenclature for synthetic diamonds. De Beers “joined” CIBJO recently as a due paying “associated member” which enabled it to get such an appointment. Thus De Beers joining CIBJO and for it to become a dominant professional force in its Diamond Commission will enable it to greatly influence the position of these “diamond industry governing bodies” on the synthetic nomenclature. Some participants at the GIA Symposium – this writer included – find this role problematic. It may deserve some rethinking.

            It is in the best interest of the diamond industry to “help” Ralph Destino and Acting President Donna Baker, who are now skillfully navigating the New GIA, from falling overboard. When a responsible industry party advises the GIA that “our attorneys are convinced the GIA may be violating the Sherman and Clayton Acts”, this should be viewed as a warning call to be heeded seriously – even if might lack any basis in fact, something on which I cannot have an opinion.

            One industry leader, recently discussing the conflicting issues with a FTC official, said that the FTC isn’t interested in little trade disputes. If someone doesn’t like a practice, let him go to court. It would be sad if the courts will have to decide ultimately on the terminology – something that has happened in the past and is probably going to happen at some point again. It is quite something else, however, for the GIA to be accused of yielding to pressures by their financial supporters by adopting positions which clearly benefit financial backers – but may not be in the best interest of the consumers.

            It is our understanding that some industry organization, possibly the JVC, has been planning to file a petition with the FTC to clearly identify what acceptable qualifiers can be used for describing man-made diamonds. Obviously, the push will be for “synthetic” and to explicitly exclude “cultured”. My U.S. friends tell me that the FTC staff that handles the jewelry related issues at FTC has changed in the past year. The new crew is believed to be open to entertaining such a petition.

            Opinion research may, however, not support the hypothesis that the consumer doesn’t understand that “cultured diamonds” are man-made. If we have learned anything from past FTC behavior, it will be guided by information on consumer perceptions. It will not take a position on the natural versus synthetics debate.

            The GIA should preserve its independence and remain totally focused on its mission. In the past year, the GIA has fairly well weathered issues that seriously affected the trust in some of its products. If it has learned anything from this period, it must be that it must, in an almost religious manner, adhere fully and totally to its own mission statement – to preserving the consumer’s trust in gem and jewelry.

            The idea that issues of nomenclature may have to be decided in court and the idea that the Diamond Best Practice Principles may conflict with FTC rules are not giving much cause for comfort. For the GIA to establish in an authoritative manner what indeed is best for the consumer should become a matter of the greatest priority.

            At the Symposium, some speakers expressed the opinion that they trust the GIA to do what is best. That is a reconfirmation of the GIA’s mandate.

            Let’s see what the GIA will do next.

            Have a nice weekend.