City-based international law firm Norton Rose LLP published a paper on "Protections against unauthorized use of Sharia-compliant financial methods and structures" in July 2011 which raises several issues relating to copyright and intellectual property especially with regards to the Sharia structures.
These issues are nascent in the context of the contemporary Islamic finance movement, which only started in the mid-1970s. But they have raised some searching questions which some critics maintain, may have blurred the lines between the required transparency of a Fatwa (legal opinion) and that of confidentially of a financial structure and contract.
There have been some celebrated cases where asset management companies and Islamic banks have launched particular Sharia-compliant products which have been trumpeted as "pioneering" and "first-of-its-kind" but whose underlying Sharia structures have never been revealed because of so-called intellectual property considerations and the Sharia advisory boards sworn to secrecy under confidentiality clauses.
Questions such as "Can a Fatwa be classified as intellectual property?" and "If an Islamic financial structure is classified as confidential how can peers evaluate that the structure is truly Sharia-compliant?" are valid and should be discussed head. Some Islamic banks have even refused to make fatwas pertaining to a product public on the grounds that they are confidential and are construed as intellectual property.
The "Guiding Principles on Sharia Governance Systems for Institutions Offering Islamic Financial Services" published by the Islamic Financial Services Board (IFSB) in December 2009 sheds some light on the question of Sharia advisories and structures and confidentiality. According to the IFSB principles, "Sharia board members should ensure that internal information obtained in the course of their duties is kept confidential."
In another article, it clarifies that "confidential information here refers to information received by members of the Sharia board or Sharia advisory firm in the course of their duties that is not public and is not authorized to be made public.
This includes information received under seal, expressly marked or designated by the Islamic financial institution to be kept confidential, or relating to the deliberative processes of the institution."
Perhaps more importantly, the guiding principles expressly stress that "information that is not considered confidential includes Sharia rules and principles, reports and pronouncements/resolutions of the Sharia board published by the Islamic financial institution for public knowledge, and other information disclosed in public documents or proceedings."
In its paper, Norton Rose rightly stressed that in the field of Islamic finance significant amounts of time, effort and money are spent creating Sharia-compliant financial methods and structures. Those who have invested their resources into creating these structures often want to prevent their repeated use (usually to protect a competitive advantage rather than to create a monopoly that could be exploited by licensing the use of the structure to third parties). It goes on to examine three principal ways in which Islamic finance methods and structures can be protected by laws pertaining to copyright, patents and confidentiality.
Copyright protects the expression or physical embodiment of an idea rather than the idea itself (the latter may be afforded protection as a patent). Where it applies, copyright will provide protection and reward a creator for the effort spent in creating the work by preventing its copying. An Islamic contract structure recorded in writing, according to the paper, may be protected by "literary" copyright. It must be "original" in order to qualify for protection; this requirement will be satisfied where work is the result of the creator's effort and skill rather than having been copied from elsewhere.
Whereas confidentiality and copyright laws may protect the unlawful disclosure of a confidential legal structure or the unlawful copying of the expression of such structure, a successfully granted patent could afford protection to the Sharia-compliant method or structure itself, says Norton Rose. A patent allows the inventor to prevent unauthorized third parties from using the invention by granting a monopoly right for the duration of the patent, which will generally commence on the date of filing the application (known as the "priority date").
However, it warns that even if a Sharia compliant financial structure can be shown to be new, inventive over what is known at the time and not obvious, it may be excluded from patent protection as it is essentially a business method. Traditionally, patent regulators have been unwilling to grant patents for business methods, although this may be changing.
The United States Patent and Trademark Office, for instance, has granted a small number of patents relating to Sharia-compliant business methods, including for a "Sharia-compliant performance linked note" and for "methods and systems for issuing a convertible financial instrument" Patent applications have also been filed for methods for providing Sharia-compliant financial services, including for a "computer-system for Sharia-compliant computer-aided method for securing a Sharia compliant credit enhancement" (filing date on Oct. 7, 2003) and a "system and method of operating a Sharia-compliant payment card" (filing date on Sept. 1, 2009). However, as Norton Rose contends, these patents and patent applications relate to inventions which involve technology through which the method or structure is implemented, rather than being based on the method or structure alone.
On the other hand, confidentiality laws may protect the onward disclosure of Sharia-compliant financial methods or structure to the extent that they are not publicly known. This might provide the only source of legal protection if the method or structure is not afforded intellectual property protection.
By way of example, in order for information to be classed as "confidential" and attract the relevant protections under English law, it must be confidential in nature and disclosed in circumstances in which an obligation of confidentiality can be imported.
"A Sharia-compliant financial method or structure that is new and innovative, such as a proprietary derivative contract, will almost certainly be inherently confidential in nature. Established contractual modes and methods of finance will, conversely, be publicly known and would probably not benefit from confidentiality protections. The details of a new method or structure are most likely to be disclosed in a business setting, which is very likely to satisfy the criteria of being disclosed in circumstances in which an obligation of confidence can be imported," stresses the paper.
The IFSB guiding principles deal exhaustively with the confidentiality issues pertaining to Islamic financial institutions and contracts; and the duties and responsibilities of Sharia advisories in this respect.
The problem is that IFSB guiding principles and standards are issued under "voluntary adoption" principles and do not carry any force in law unless enshrined by individual countries though ratification and adoption.
Norton Rose concludes that rights conferred under confidentiality and copyright laws are easier and cheaper protections to secure than patent protection. However, should the inventor of a method or structure be successful in securing a patent, this right will provide more robust protection against infringement as it creates a monopoly right for the inventor. It warns however that a patent application can be a lengthy and costly process and a patent is only enforceable in the jurisdiction in which it is granted.
In the meantime, the law of copyright and law of confidence (together with any contractual rights that can be enforced) will continue to form the primary options for legal protection of Sharia-compliant financial methods and structures.
Source: Arab News, Saudi Arabia, August 29, 2011. Changes were made in keeping with the editorial policy of www.memrieconomicblog.org.