The European Union Competition Commission has given its stamp of approval to De Beers’ plan to open retail stores with LVMH but expressed serious doubts about the legality of the company’s new “Supplier of Choice” strategy.

In line with those doubts, the EU has sent De Beers a “statement of objections” regarding the company’s new direction. A source at the EU calls it “a reasonably strong statement,” but neither De Beers nor the EU is spelling out what those objections are.

A release from the European Commission—the EU’s policy arm—did point to one aspect of the new system: De Beers’ new agreements with its sightholders. “These agreements are designed to formalize what has so far been an informal commercial relationship between De Beers and its customers for the purchasing and selling of rough diamonds,” the statement said. “A number of restrictions and trading conditions in the ‘Supplier of Choice’ agreement appear to violate European competition law.”

EC spokesman Michael Tscherny says, “We were worried that De Beers would abuse its dominant position so they could impose unfair trading conditions on clients. The way the planned agreement stands, it’s a very unbalanced agreement.” But he declined to comment on just what provisions the EC objected to.

The Commission release also seemed to raise doubt about the “Forever Mark”—De Beers’ attempt at a co-brand for sightholders. The new “mark” currently appears at the end of the company’s commercials. “When we looked at the whole thing— ‘Supplier of Choice,’ the Forever Mark, the joint venture—it wasn’t a pretty picture,” says the EU source.

Since De Beers voluntarily notified the Commission about “Supplier of Choice,” there’s nothing legally stopping De Beers from implementing the new strategy, which originally was supposed to launch in June. However, De Beers has said it wants its new policies to comply with the law. Analysts say the fact that the EC didn’t reject “Supplier of Choice” outright was somewhat positive, and they predict that De Beers would begin a period of “horse-trading” to win the EC’s blessing.

De Beers spokesman Andrew Lamont wouldn’t speculate on the company’s next move. “We are still discussing the statement of objections with our advisors,” he says. “We will not say anything that will prejudice those discussions with the EU. We welcome the exchange with them.”

The EC source says, “At the moment it’s way too early to say what the likely outcome is going to be. The ball is in De Beers’ court. These cases can take a long time to sort out. But there is an interest in getting this sorted out as soon as possible.”

De Beers also has the right to respond to the EC’s comments at oral hearings before EU member nations.

De Beers did score a significant victory by receiving the EC’s okay for its retail venture with LVMH. A past statement from the EC expressed concern that the new venture would boost demand for De Beers diamonds at the expense of others and that De Beers would steer its best diamonds to the new venture. However, the EC source notes, “Our test was: Would a deal create or strengthen a dominant position? That’s a high hurdle.”

According to the source, the size of the venture tipped the balance: “They are saying that this will be as big as Tiffany’s in 10 years’ time. That’s only a few percent of the market. Even if they do favor the sightholders that sell to LVMH, we don’t expect this to have a big effect on the market.”

Officials of the new venture, known as Rapids World Ltd., could not be reached for comment. De Beers managing director Gary Ralfe says he hopes the first store will open by Christmas 2002.