Auction Houses vs. Luxury Retailers Myth & Reality

Auction houses have become the most visible and powerful force at the top end of the jewelry selling industry, but this success has bred resentment. Retailers who’ve watched their grip on the high end of the market slip say the auction houses have unfair legal advantages. They also charge that auction houses overlook forgeries and forget disclosure rules. The auction houses beg to differ. Who’s right? In the glory days of famous jewelers – Winston, Cartier, Tiffany, Van Cleef & Arpels – nearly every famous diamond, ruby and sapphire was set in a mounting bearing the signature of one of these houses.

Today, these venerable retailers and some famous newcomers still sell many jewels, but the two houses that have made all the headlines in the past decade aren’t jewelers at all. They are Christie’s and Sotheby’s, the world’s largest auction houses. Each holds four large auctions annually, two in New York City and two in Switzerland, plus increasingly large auctions in Hong Kong. Their combined yearly jewelry sales volume is $500 million and growing.

Most top jewelers acknowledge – albeit grudgingly – these auction houses have captured the lion’s share of the top end of the jewelry market. In fact, jewelry sales at auctions have increased more than five-fold in the past decade. The auction houses’ ability to generate the publicity and “mystique” that famed jeweler Harry Winston Inc. had done a half century before is a huge contributing factor to their dominance.

Though the majority of bidders at auctions once were jewelers and gem dealers, now private buyers comprise half the audience. To stimulate sales to these non-industry bidders, auction houses have begun aggressively contacting retailers’ prime customers – well-heeled private buyers – through advertising, mail promotions, expensive catalogs and seminars.

Creating cachet: This explosion of jewelry auction sales in the past decade has created a demand for top jewels that far exceeds the supply of available estate pieces. When this happened, auction houses had to decide whether to limit their growth to the number of top estates they could represent or to commission new pieces. In 1986, both houses began to sell new goods. Today, about one-third of all jewelry in major auctions – including the majority of larger loose diamonds and many big necklaces and earrings – are new pieces from dealers and manufacturers.

Auction houses have welcomed this opportunity to grow. “It’s like any other business,” says John Block, international jewelry director at Sotheby’s. “To grow, we either increase our commissions or increase our volume. If they are beautiful pieces and the price is right, people don’t care if they are newly manufactured.”

François Curiel, international jewelry director at Christie’s, sees the progression of the auction business in a larger context. “We’ve seen a radical change in 25 years, from the times when 10 or 12 people attended auctions, eight of them dealers,” he says. “Now we have hundreds, with more than 50% private buyers. But we are not the only ones who’ve changed radically. The whole industry has. How many diamond dealers now sell retail or to private buyers? How many now manufacture jewelry? We’re just part of this evolution.”

Jewelry sales at auctions have increased more than five-fold in the past decade.

Level playing field? On the face of it, the auction houses’ decision to sell new jewelry and to court private buyers makes them look like the high-end equivalent of mass marketers – just another competitor for jewelry dollars once spent almost exclusively in jewelry stores. Shawn Sullivan, chief operating officer for Van Cleef & Arpels’ U.S. group, calls the world’s top jewelry houses an endangered species.

Auction competition is one of the main reasons. “We no longer have diamond dealers come to us asking us to sell some of their top stones on their behalf,” he says. (Top jewels are too expensive for jewelers to hold in inventory now, so most want them on memo. But gem dealers believe they’ll get paid faster by selling at auction.)

While such griping could be perceived as sour grapes, prominent retailers have started to complain that auction houses have a real advantage over retailers. They say auction houses don’t have to adhere to laws governing retail sales. Retailers also allege auction houses sell treated gemstones without proper disclosure, represent newly manufactured pieces as jewels from the 1920s and 1930s and pass off – unwittingly or purposefully – forged or extensively altered signed pieces, while claiming the buyer is responsible for determining the difference.

Firing back, auction executives say they follow the same rules as their retail counterparts. They print disclaimers in their catalogs noting gems may be treated, label jewelry differently depending on the certainty of authenticity and do not knowingly label newly manufactured jewelry as antique. Auction executives maintain they disclose as much, if not more, than retailers do about jewelry.

Auction houses distinguish between the pieces they guarantee and those they don’t by the way they print the descriptions of the pieces in their sale catalogs.

The laws in New York City (where a majority of U.S. auctions take place) show that auction houses and retailers largely have the same obligations under New York state’s “Specific Business and Industry Regulations.” These regulations require any jewelry seller to provide a sales slip with the price of the item, the weight of the diamond(s) and a full description of the article and its materials, including a declaration indicating a stone is synthetic or imitation if that is the case.

The regulations also prohibit auction houses and retailers from misleading the consumer about a piece of jewelry’s “type, kind, name, grade, quality, quantity, size, weight, color, character, substance, durability, origin, prior ownership, price or value.”

Both entities must inform the owner of a piece of jewelry how an appraisal of price was determined, must inform the owner not to expect to sell the piece for the appraised value and state the appraisal value may vary by 25%. After that, though, auctioneers operate under a different, yet comparable, set of guidelines than do retailers and antique dealers in New York City. Here’s how the guidelines compare:

•Records – Antique and estate jewelry dealers must keep a book of records detailing each article’s description, markings and condition; seller and buyer names; and date and hour of the transaction. Auction houses must record the names and addresses of all consignors and owners; copies of all advertisements; lot numbers, quantity, descriptions and selling prices of each lot; and records of disbursements to consignors. Both must provide these records to police upon request. Auction houses also must provide a contract to the consignor stating the jewelry is the legal property of that person.

•Refunds – Though some retailers say they are required to provide refunds while auction houses aren’t, New York City laws say only that retailers must conspicuously post their refund policies, whether or not they provide refunds. Auction houses print refund policies in the front of their catalogs, though there is no law mandating or governing such posting.

•Statements of fact or representation – Retailers cannot exaggerate or make ambiguous statements about material facts. Auctioneers are prohibited from knowingly making false statements or representations about the quality, condition, ownership, situation or value of any property. Auction houses operate under the “everything sold as is” disclaimer that is printed in the front of their catalogs. The disclaimers say the houses do not guarantee quality, rarity, provenance or importance of jewelry sold. But in truth, auction houses make important exceptions, which are also detailed in the front pages of their catalogs. When information is printed in all-capital letters (Christie’s) or bold-face type (Sotheby’s), the auction houses fully guarantee those facts. If it is determined by recognized experts that a fact printed in this type is untrue, auction houses will take back an item and make refunds. Auction houses do not guarantee any statements appearing in lower-case or italic type.

•Pricing – Retailers must conspicuously display the price of every item with a stamp, tag, label or sign and are prohibited from making false or misleading statements about price reductions or comparisons with competitors’ prices. In other words, they cannot declare an item is being sold at “sale” price if the price is not substantially lower than the ordinary price. Neither can retailers claim to have the “lowest prices” in the area if they do not “systematically” monitor competitive prices, according to law. Pricing rules are different for auction houses, because the method of selling is different. The traditional purpose of an auction house is to sell an item for a consignor, who sets a minimum price called a “reserve.” Auction houses don’t disclose the reserve because they wish to get the highest price possible. They do publish an estimate, and the law says the reserve may not be higher than the lowest estimate for a piece. (If a necklace is estimated at $500,000 to $800,000, for example, the reserve must be $500,000 or less.)

Auctioneers are allowed to talk up or simulate bidding to the point of reserve if the catalog carries a disclosure saying it is being done. But the auctioneer can’t make these false bids after bidding has reached the reserve.

Auction houses print a disclaimer near the front of their sale catalogs noting a gemstone may be treated and that they cannot make warranties one way or the other.

To fool the eye? Many retailers also accuse auction houses of frequently selling – inadvertently or deliberately – forged or altered signature pieces without disclosing suspicions about authenticity.

Jewelry made during the gilded days of the 1920s and 1930s by Van Cleef & Arpels, Tiffany and Cartier often attract bids at least 50% higher than similar pieces without these famous signatures. Though these jewelers keep meticulous records, they don’t always open them to jewelers or auction staff. As a result, forgeries abound. Even when a signature can be verified, quite often the pieces were substantially altered over the years as they went through various owners. Such pieces often turn up at auction houses, where they are often sold under the “as is” disclaimer.

Cartier has become increasingly alarmed over the number of bogus pieces bearing its name moving through major auction houses, says Ralph Destino, chairman of the company’s New York City office. “We’re furious over the extent to which our name has been counterfeited,” he says. “People take no-name jewelry from the 1920s and 1930s and engrave our name on it or assemble jewelry from a small piece with an authentic Cartier stamp in hopes of getting the high premiums our name can bring,” he says.

When Antiquorum, a Swiss auction house, and Etude Tajan of Paris teamed to prepare an all-Cartier auction in November, Cartier’s people looked at more than 1,000 pieces considered for the sale. Cartier and the auction houses worked closely to be certain every pieces in the sale was authentic and original. “We found many, many fakes,” says Destino. Cartier is using the publicity generated by the Antiquorum sale to call attention to the problem. “We want auction buyers to be on guard against all the fakes in the market and we believe this is the best way to do it,” he says.

Even authentic pieces can be changed substantially. Joseph Samuel of J&SS De Young recalls buying, with several partners, a Cartier emerald necklace at a William Doyle galleries auction. Samuel sold his interest in the piece, then saw it again at a subsequent Sotheby’s auction. “The major emerald in the piece was no longer there, but the [Sotheby’s] catalog listed the piece as ‘by Cartier,’” he says. “Don’t auction houses have the obligation to say whether something’s been altered?”

Block and Curiel acknowledge altered pieces and forgeries have slipped past their staffs, saying the sheer volume – thousands upon thousands of pieces – makes it difficult to verify everything. But Curiel says two staff people check signed pieces to verify the signature is genuine and when there’s a doubt, they try to check with the maker of the piece, if that company is willing to work with them.

“I’m not saying we are perfect,” Curiel says. “There’s bound to be a few cracks, a few errors.” Curiel recalls a Van Cleef & Arpels diamond bracelet that went through auction three times, selling to dealers on each occasion. “Three times dealers bought and sold it again. It was five or six years later that we were confronted with the idea that it wasn’t actually by Van Cleef,” he says. “So I looked at the signature and it was atrocious. We should have noticed that from Day 1 and we didn’t. But neither did the three dealers who bought it nor anyone who looked at the piece during the viewing periods.”

Destino says Cartier is willing to authenticate pieces for anyone who asks, but adds that auction houses and dealers usually seek that service for only a fraction of the pieces sold under the Cartier signature.

Because the auctions handle such a large volume of jewelry, the staff experts do not have the time to authenticate each piece, auctions say. Therefore, when auction staffs have doubts, they print descriptions of signatures in lower-case type or italics. They also use phrases such as “signed by Cartier” or “bearing the marks of Van Cleef & Arpels” to indicate the signature may not be real.

Though all auction catalogs note the differences in typeface in the “Conditions of Sale,” retailers charge that many private buyers, and even some professionals, fail to see the notice. The “Conditions” also do not explain the meanings of certain phrases, which retailers see as misleading. “I was looking at pieces at Christie’s before a sale, and a woman beside me inquired as to why one piece in a series had a lower estimate than the others,” recalls retailer Peter Schaffer of A La Vieille Russie in New York City. “Reading the descriptions, we saw that one description began ‘Bearing the marks of’ while the others said ‘By.’ I think that is a little obtuse. I know the information is there, but I don’t know how many people read the descriptions that closely.”

Disclosing treated gemstones: Retailers and experts charge that auction houses are similarly lax about disclosing treated gemstones. A check of Christie’s and Sotheby’s catalogs, however, shows the auction houses print a disclaimer near the front of their sale catalogs noting a gemstone may be treated and that they cannot make warranties one way or the other. Many retailers feel that’s not enough. One key dealer says the auction houses, because of their public forum, have a particular responsibility to the public to ensure they tell their buyers what’s happened to the emeralds, rubies and sapphires sold in their showrooms. Ralph Esmerian, a fourth-generation New York City dealer in precious stones and a frequent buyer at auctions, says the problem is industry-wide and agrees it didn’t start with auction houses. However, he says the auction houses have to take the first step because they’re in the public eye.

“They have a tremendous responsibility to the industry because they’re on top now,” he says. “If a piece brings $3 million or $4 million or $5,000, that responsibility is still there because the public theater the auction houses create have helped to renew confidence in the jewelry industry.”

Auction executives realize many of the gemstones sold in their showrooms have been heat-treated or irradiated to improve color or clarity. In addition to warning bidders that gems may be treated, Christie’s recently began to submit its most important colored stone pieces to the American Gemological Laboratory in New York City for testing and noting untreated gems in its catalogs.

Auction executives say they follow the Federal Trade Commission Guides, which require disclosure of all non-permanent treatments by listing the treatment warning in the disclaimer in the front of the catalog. Cap Beesley, president of AGL, and many others believe the FTC rules are too lax, but auction executives don’t believe they should be held to a higher standard than the vast majority of retailers. Their attitude is that they’ll disclose everything when retailers do.

“Some retailers disclose more than the auctions do, but many others, including the top people, often disclose less,” says Block of Sotheby’s. “It’s the industry as a whole, not just the auction houses, that should develop a set of rules stating what should be disclosed and when.”

Block adds that associations such as the International Colored Gemstone Association and others cannot agree on such a standard. “They have tremendous problems getting their views together,” he says. “To try and get anybody to agree on certain types of disclosure is a difficult thing.”

Sotheby’s, he says, often will tell prospective buyers much more than what’s in the catalog. “If they are interested in a $300,000 piece, we will answer all of those questions, even unsolicited,” he says. “If it’s a $3,000 piece, the buyer may not even think to ask, but if they do, we’ll give our best opinion. We offer full disclosure.”

There is an economic reality that dictates what auction houses will do to determine treatment. “What do we do with a $4,000 ring in which we make a commission of $240?” queries Curiel. “That we would pay to test the large, expensive pieces of jewelry that we sell isn’t the issue. The average price of jewelry sold at Christie’s last year was $12,000, not $1 million. What do we do with all of those smaller pieces?”

Auction staff could be better trained to spot certain common treatments, synthetics and fracture fillings, says Beesley. He has offered auction houses free sessions to educate their staffs on treatment identification. Christie’s has taken him up on the offer.

In addition, Beesley suggests auctions could require the seller to pay for, or split the cost of, testing gemstones offered for sale. The auctions and industry could reconcile most disclosure issues if retailers, auction houses, dealers and manufacturers worked together to set a common standard, he says.

Adds Block, “If we had a group to set the standards, then it’s a shared responsibility, and we can do it. The industry is going to be forced by the market to move toward disclosure, and the auction houses reflect the direction of the industry as a whole.

“It’s the industry as a whole, not just the auction houses, that should develop a set of rules stating what should be disclosed and when.”– John Block of Sotheby’s.

Peaceful coexistence: Block says auction houses aren’t out to hurt retailers because they depend on many retailers to buy at their sales.

Retailers admit that while auction houses are giving them a run for their money, they also depend on auctions to buy and sell merchandise. “Auctions are both a blessing and a curse,” says Barbara Macklowe of Macklowe Gallery, an art jewelry gallery in New York. “I find the benefits outweigh the detriments.”

In addition, some retailers say they’ve found the best bargains for their stores at auctions. They also use the publicity of auctions to sell their own stock. “The auctions are a happy way to get rid of merchandise that’s not selling in your store,” says Ward Landrigan of Verdura in New York City. “If I have a piece on my shelf that hasn’t sold, I’m willing to put it in the auction and take my chance.