Diamond Overgrading Lawsuits: Will They Hold Up in Court?

Looking at the thorny issues in two recently filed cases

As I reported last week, Nashville law firm Cummings Manookian has launched social media campaigns and threatened lawsuits against five jewelers for allegedly selling diamonds with EGL International reports. At press time, it appears only one of them has actually been sued.

On Jan. 19, two lawsuits were filed in Montgomery County, Md., circuit court against Washington, D.C., retailer Mervis Diamond Importers. 

The twin cases are similar to those firm partners Brian Cummings and Brian Manookian filed against Genesis Diamonds in 2014. (The firm is referring counsel to the suits.) In the first, plaintiff Robert Ramsey said he purchased a 2.52 ct. diamond ring from Mervis in June 2014. Its EGL International report called it an F SI diamond, excellent cut. When it was submitted it to the GIA, it received an H I1, very good cut, the suit says.

In the second, the papers say, Javier Garcia and Jennifer McMullen purchased a 2.2 ct. ring in September 2014. It carried an EGL International report calling it E SI2 excellent cut, the suit says, although the GIA rated it H I2 very good. (See correction below)

According to the filings, Mervis’ appraisals said Ramsey’s stone and custom setting was worth $30,000, while Garcia’s and McMullen’s ring was worth $28,000. With its new grades, the legal papers claim that Ramsey’s stone is worth $12,000, while Garcia’s and McMullen’s was worth $3,400. The suits seek triple damages and attorney fees. (The suits’ numbers will undoubtedly be challenged, but we will get to that.)

The plaintiffs are making a simple case: The jewelers sold the rings as one thing. The customers received another. Whether that argument has merit, the contentions in these specific cases will likely be disputed. 

As one lawyer unaffiliated with this case pointed out to me, the suits don’t mention the price the consumers paid for the rings, and that might be deliberate:

It may be the price [the plaintiffs] paid was much closer to the actual value of the diamond as asserted by other appraisals.  If the plaintiffs cannot prove that they were economically harmed —only that they thought they were getting a bargain that ultimately they did not receive—then these lawsuits may fail.

Plaintiff attorney Mark Hammervold, of course, sees it differently: “Compensatory damages are calculated based on the difference in value between what was promised and what was received,” he emailed.

Applying this formulation to jewelry sales could mean trouble for any jeweler—even any retailer—that uses inflated appraisals, another problem in our business.

But let’s look at how Hammervold calculates “the value of…what was received.” From his email:

For diamond over-grading cases, this value is easily measured using the Rapaport Report from the month of the sale. That publication is a monthly industry report that is used by wholesalers/retailers to measure the market price of diamonds, based on the color and clarity grades of a diamond (assuming a GIA-level grade, of course).

I don’t know where this info came from—the Rap list comes out every week, for one—but many would disagree with the contention that measuring the value of any diamond is “easy.” Writes authoritative diamond journalist Chaim Even-Zohar in a piece last week:

There exists no specific price for a diamond; at best a price range. Even on that point, one may argue.

It is also not clear if a court will accept the Rap list as the absolute arbiter of a diamond’s value, given that its prices are the publisher’s opinion and often lag or outpace the market. To truly understand the Rap list, you must take into account its discounts and sometimes premiums. And, of course, not every retailer prices their diamonds “at Rap.” Perhaps a well-trained appraiser could, with a lot of research, determine a fair retail price for a diamond bought a year and a half ago. But that person likely wouldn’t rely solely on the Rap sheet. (At press time, Hammervold and cocounsel Michael L. Schlepp have not responded to follow-up questions.)

This formulation also leaves out the cost of the mountings and possible labor. Even if we grant that the diamond is worth only $12,000, the settings and other aspects cost money, too. That was also an issue in the cases against Genesis.

But those are just details about these particular suits. The bigger picture is a little more interesting.

In a September 2014 interview with JCK, Manookian spelled out his legal theory for these suits:

Forty-three states and the District of Columbia have some form of consumer-protection statute that expressly prohibits misrepresenting the quality of goods you sell or making deceptive statements about their certification, sponsorship, or affiliation. It is beyond settled that doing those things will subject a retailer to significant legal liability.

Obviously, retailers should accurately represent the quality of their goods—which, I agree, includes selling accurate grading reports. Yet the legal theory here remains untested.

As far as I know, no case law backs up the contention that selling diamonds with EGL International grading reports meets the legal definition for fraud or misrepresentation. What the trade believes and what courts might rule don’t always line up. All the cases to date on this issue have seemingly been settled.

Let’s put aside the argument over whether there is an actual grading standard, although I doubt Mervis’ lawyers will. Let’s look at diamond grading itself. Following my blog last week, one commenter compared selling an EGL International report to a car dealer setting back an odometer. Again, it is not clear where this person got this information, but odometers measure something objective. Diamond grading is subjective. Reports list opinions, which is one reason the Jewelers Vigilance Committee has said they should not even be called certificates. That is why we see disparities at—and among—even the best labs. It is also why there is an industry standard one-grade tolerance.

In addition, all reports, even the GIA’s, typically include a long list of limitations on their backs. EGL International reports said that its documents “represent only the best professional opinion of this company.” Both say the reports are not warranties.

At least two judges have cited report disclaimers in court rulings. In one California appeals court case, a judge noted that an American Gem Trade Association report entered into evidence “specifically stated that it was subject to numerous limitations.” Similarly, in an opinion on the court case between the EGLs, a New York federal judge expressly noted that: “As [is] custom in the industry, diamond-grading certificates normally contain a disclaimer warning purchasers that ‘grading is not a precise science [and] is subjective.’ ”

When you are talking about consistent differences of three or four grades, it is hard to point to subjectivity. But that’s my opinion; a court may not agree.

In any case, we may soon find out. Manookian has said his aggressive social media and flier campaigns are meant to find plaintiffs. Yet they have apparently made at least some of the targeted jewelers dig in and gear up for a protracted legal battle. (Mervis counsel Robert Greenberg tells JCK, “We intend to defend any and all of these suits vigorously. We expect to win each one of them.”)

For the industry, the dangers are numerous. If GIA gets ruled the sole authority, some worry retailers could become a target if they use any report but GIA’s. On the other hand, a ruling that says, essentially, that no standards exist for diamond grading could throw the industry back to the old “anything goes” anarchy.

In the last year, trade groups have said that all labs should adhere to the GIA standard, for color at least. That is good. It should have happened a long time ago. If it did, we might not be facing this mess. But the ultimate solution may be for diamond grading to become objective, so it really could be measured by something like an odometer.

For years, people have warned that the trade could face lawsuits over disparities in lab grading. Now those suits have arrived. Whether they will succeed is another matter.

Much more on all this soon…

Correction: This post originally misstated the GIA’s verdict of the second diamond’s clarity, according to the complaint. It received an I2.

 

Update:  In a prior version of this post, JCK linked to third-parties’ websites that related to its subject matter.  Those websites demonstrated the existence of a public controversy upon which we were reporting.  The content of those websites, including the views and opinions expressed therein, are those of their authors.  Those views and opinions were not published by JCK, and JCK does not necessarily endorse the contents of the third parties’ websites.  JCK has elected to remove the links from this story.

 
 
 
 
 

JCK News Director