This week we planned to disclose that “luxury brand Montblanc is using deceptive and unfair trade practices in the advertising of its Meisterstuck Solitaire Royal Black Diamond fountain pen featuring 4,654 black diamonds - a writing instrument that retails between $150,000 and $200,000 per piece.  The same deceptive and unfair trade practices are also followed in the marketing of other models of Montblanc pens and ballpoints studded with black diamonds.” This was definitely a shocking news story with implications for all stakeholders, including diamond suppliers – who are basically prohibited by various ethical codes and FTC rules and De Beers Diamond Best Practice Principles to supply treated diamonds to downstream clients who don’t disclose these treatments to their clients and/or the end consumer.

            We planned to disclose our “evidence” – i.e. the fact that a disclosure contained in a supplier’s invoice to Montblanc is not carried by the luxury brand giant’s marketing materials, and we posed a series of questions to Montblanc’s joint Managing Directors Lutz Bethge and Wolff Heinrichsdorff. We posed our questions last weekend, aware that there would be a national holiday in Germany this week. A few hours before our deadline, Monthblanc’s joint managing directors informed us as follows: “Although we disagree with your interpretation of American law regarding what sellers might be required to do regarding black diamonds that have undergone a thermal treatment, we fundamentally agree with you that we want Montblanc's customers to be fully informed about product details. That is why we are voluntarily adding information to our website and in-boutique brochures to advise potential customers that the natural black diamonds used in our writing instruments have been treated, that the treatment is permanent, and that the treatment does not require any special care.”

            Montblanc shows that, if it wants, it can work expeditiously: anyone accessing its website will see that, as of this morning, a disclaimer has been added. So our initial headline about “serious infringement of disclosure rules” was quickly changed to “Montblanc commits to disclosure enhancement treatment of its black diamonds.” Though we wish to pay tribute to the company’s unequivocal and quick action, which prevented serious damage to its brand name, we also must express disappointment that we have not yet received replies to a number of specific questions that we raised with Montblanc and its parent company, Richemont.

            We asked, for example, whether Montblanc would conduct a recall of all black-diamond pens sold or, alternatively, inform all purchasers that Montblanc failed to disclose that the diamonds have been treated and that, consequently, the diamonds are of a substantially lower value. We asked whether Montblanc would provide purchasers of pens or ballpoints containing black diamonds an option to return their pens and to be reimbursed. Answers have not yet been forthcoming to these questions. 

Supplier’s Legal Obligation:

            Montblanc advised us that “The United States Federal Trade Commissions' (FTC) Guides for the Jewelry, Precious Metals, and Pewter Industries clearly allow sellers to advise customers about gemstone treatment at the point of sale unless the products are mass marketed, which these [luxury jewel-encrusted writing instruments] are not.” The company explains that “Montblanc does not mass market these writing instruments in television or magazine advertising campaigns, although they are viewable on Montblanc's website and in brochures in Montblanc's boutiques. These are luxury products of an extremely limited quantity sold through personal contact with the customer.”

            We are not sure that we share the view that this method of selling and marketing allows for a “voluntary” treatment disclosure – we believe it to be a legal imperative. The FTC Jewelry Rules state that “the disclosures are applicable to sellers at every level of trade, and they may be made at the point of sale prior to sale; except that where a jewelry product can be purchased without personally viewing the product, (e.g., direct mail catalogs, online services, televised shopping programs) disclosure should be made in the solicitation for or description of the product.”

            Especially, in the case of writing instruments costing between US$150,000-US$200,000 a piece – and which are often custom-made and ordered six months in advance. When the consumer doesn’t see the product when ordering, it is imperative that product description on all levels of the product marketing and advertising contains the treatment disclosure.

            Virtually every major consumer market has similar rules. In Canada, the jewelry rules state “purchasers of diamonds (both consumers and trade) should be advised that some diamonds are treated by methods that duplicate natural processes, are often undetectable by standard gemological techniques and are stable and permanent. The vendor must always provide to the purchaser information regarding any treatment that may have been applied to the substance offered for sale.”

            This also raises a question about Montblanc’s vendors: diamond companies that supplied the black diamonds undoubtedly made a treatment disclosure statement. They have, certainly under Diamond Best Practice Principles, an obligation to ensure, as much as they can, that their clients also carry these disclosures. How come that Montblanc was able to market a series of pens containing treated diamonds for a number of years without any supplier raising this issue? Were they afraid “to lose a fantastic client?”

The Richemont Connection

            Montblanc’s belief that disclosure is only required at the final point of sale may also run counter to the corporate responsibility credo of Richemont, its mother company. As is well known, Richemont is one of the world’s leading luxury goods groups, and its interests encompass several of the most prestigious names in the industry including Cartier, Van Cleef & Arpels, Piaget, Vacheron Constantin, Jaeger-LeCoultre, IWC, Alfred Dunhill and, Montblanc. Richemont considers the group to be part of the Council for Responsible Jewellery Practices (CRJP).

            It states so prominently both in its 2005 Annual Report and on its corporate website.  “We believe that an integrated approach to promote responsible business practice within the diamond and gold jewelry supply chain is necessary.  This is why, Richemont, through Cartier, was one of the 14 founding members of the Council for Responsible Jewellery Practice. Van Cleef & Arpels and Piaget are also members. The Code of Conduct of CRJP states: “Members will disclose the fact that a Diamond has been treated.”  It is intolerable that Richemont, through its membership, sets standards for the behavior of others – but doesn’t seem to apply these standards to its own brands?

            This gets me to CRJP’s CEO Michael Rae and his fellow directors: Is membership just something that looks good on websites and annual reports, or does the CRJP enforce its own rules? Montblanc’s Meisterstuck fountain pen is one of the best-known and most famous writing instruments of our time. Says Montblanc: “Hand-crafted in the best European tradition, its 18 K hand-ground gold nib with platinum inlay, three gold-plated rings, gold-plated clip, and deep black precious resin barrel make this luxurious writing instrument a legend among fountain pens.” If such a central product, which is featured at jewelry trade shows around the world, has been able to get away with non-disclosure of treatment for a few years, what does this say about CRJP’s monitoring and enforcement mechanisms?

This is not just an insolated disclosure problem involving a high street jeweler in a small village mall.  The Montblanc brand is more than just luxury pens, watches, jewelry, and leather goods since it also markets eyewear, perfume, and cologne. Montblanc products are sold in some 9,000 authorized outlets (including jewelers) and 260 Montblanc boutiques in more than 70 countries. In the United States and Canada, where disclosure rules on diamonds are very specific and very strict, Montblanc operates 41 boutiques and 80 shop-in-shops in selected jewelry and department stores. The black diamonds pens have been marketed for a few years (we believe since 2003) – how is it possible that this remained undetected or unreported?

Value Issues and Consumer Compensation

Montblanc prides itself that its Meisterstuck Solitaire Royal Black Diamond fountain pen is the most expensive pen in the world.  Undoubtedly, the value element is a major part of the marketing. In our letter to Mont Blanc management we said that “one might conclude that the “treated” factor was omitted in order to maximize the selling value and to avoid “degrading” the product.” In the meantime, I received an e-mail from an ex-director of a Richemont group company, whose counsel I had sought, which said, “This story is hard to believe given Richemont's frequent preaching of a gospel of ethics. I can only speculate that the people at Montblanc are historically fountain pen people and not jewelry people (let alone diamond people!), and they simply are unaware of the rules of the game – though ignorance of the law is no defense.”

We are convinced, also because of the utter candidness and openness Montblanc has displayed to us, as well as their readiness to deal with this "reputational" issue on a managing director level, that there were no bad intentions.  No intention to deceive. At most, sheer stupidity or (surprising) ignorance. In our day and age, these attributes represent neither a crime nor a monopoly. However – damage has been inflicted on consumers.

Let’s look at the most expensive pen in the world, the Meisterstuck Solitaire Royal Black Diamond.  Its current product sheet and the advertising, also at trade shows, notes that the 4,654 stones have a total weight of 17 carats, thus an average of 0.0036 carat per stone – which makes these diamond infinitely small.

Generally, color enhanced black diamonds were, originally, diamonds of very poor quality (with heavy piques inside) – so heavily included that only way to get some money for them is to turn them into black stones.  The explanation by Montblanc is not sufficient for us to exactly determine the treatment process followed and we suspect that they are the result of high-temperature heat treatment (somewhat more than 1,000 degrees Celsius). These diamonds have been produced regularly in India over the last five years. Essentially one takes highly included (lots of fractures) diamonds and put them in a furnace creating graphite precipitation within the fractures resulting in evenly colored black diamonds.

Treated black diamonds in the range used on Montblanc pens would sell (within the trade) for $30-$70 per carat or less, while natural un-enhanced black diamonds would go for $350-$500 per carat. In these small diamonds, the difference between treated and non-treated may well be more than a factor of seven to 10. Then there are the additional writing instruments, such as the Boheme Royal Black and White pen (1,351 black and white diamonds), or the ballpoint (containing 3,081 black diamonds for a 13.1 carat total weight). Until now, no disclosure has been made about the enhancement process.

The FTC rules state that “it is unfair or deceptive to fail to disclose that a gemstone has been treated if the treatment has a significant effect on the stone’s value.” In the case of an “emotional product”, such as these extraordinary expensive and unique pens, the fact that these stones are not untreated natural black diamonds makes a major difference. We hope that Montblanc management will consider being proactive in compensating purchasers – or at least by providing them with such an option. Noblesse oblige.

Proactively Defending the Brand

A major Indian diamantaire and DTC Sightholder, with whom we discussed this issue, made some remarks that should be taken to heart by Montblanc management.  According to trade experience, Montblanc has always insisted that suppliers declare that their black diamonds are truly natural diamonds – and not synthetics. In Surat, these infinitely small diamonds may, inadvertently, be mixed with synthetic materials that are available in the market.  Some suppliers have admitted that they cannot be hundred percent sure and have been unwilling to make such an unequivocal confirmation.

“It is too difficult to know whether the stones are natural or not...  I hope Montblanc has not been solely depending on the undertakings of their suppliers.” Gem labs will admit the difficulty in ascertaining the origins of these infinitely small diamond materials. There is absolutely no suggestion here that the diamonds used by Montblanc are anything but natural. It seems prudent, however, that a company like Montblanc that has such a powerful brand, such a high standing in the market, and so much to lose, would become more proactive in monitoring its diamond products. It is unlikely that any consumer would sacrifice his Meisterstuck and let a lab take it apart – but it should not be too difficult to for Montblanc to send, occasionally, a parcel to the GIA or to another lab. Reliance on the disclosures made by the vendor is, of course, always essential. But the marriage of a most problematic product (near worthless small enhanced stones) with the world’s ultimate luxury writing instruments should invite some serious thoughts – even when assuming, as we are, that all disclosures are honest and above board.

Have a nice weekend.