The U.S. Supreme Court ruled today that pharmaceutical sales representatives employed by GlaxoSmithKline were exempt from overtime pay under the federal Fair Labor Standards Act's "outside salesman" exemption.  The Court's decision in Christopher v. Smithkline Beecham Corp. resolves conflicting views expressed by a number of federal courts.

For a more-complete discussion of this development, read our Legal Alert.

Ultimately, the Court's ruling dealt with whether a GSK sales representative was "making sales" within the meaning of the U.S. Labor Department's "outside salesman" exemption regulations.  This necessitated the Court's interpretation of the term "sale" as it is used in the FLSA.  The relevant Labor Department regulations contain additional requirements for exempt status, so employers should not take the Court's ruling to be broader than it is (especially those outside of the somewhat unique setting of the pharmaceutical industry).

Also, employers should keep in mind that the Court's decision did not involve the requirements or parameters of any sales- or selling-based exemptions under the wage-hour laws of states or other jurisdictions.

The Court refused to defer to USDOL's views expressed in a friend-of-the-Court brief to the effect that the sales representatives were not "making sales".  The Court said that the pharmaceutical industry had had no "fair warning" of these views, and that accepting them now would cause "unfair surprise" and would impose potentially enormous liability for conduct that occurred before USDOL's position had been announced.  The Court also observed that not until 2009 had USDOL ever challenged the decades-long, industry-wide practice of treating such employees as exempt.  The only plausible explanation the Court could see for this was that USDOL had acquiesced in the industry's practice.

Much the same thing can be said about other USDOL pronouncements in recent times, especially its April 2011 commentary embracing unprecedented fluctuating-workweek "interpretations".  Perhaps today's ruling will persuade the courts to reject those positions also.

◊   Have a comment or something else to add?  Please use our comment feature below.

The Ninth Circuit U.S. Court of Appeals (Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, and Washington) has added another chapter in the saga of whether pharmaceutical sales representatives (PSRs) qualify for the federal Fair Labor Standards Act's "outside salesman" exemption.  The court recently ruled in Christopher v. SmithKline Beecham Corp. d/b/a GlaxoSmithKline that the Glaxo PSRs did fall within the exemption.  The decision creates a split in the federal appellate courts by finding that the exemption applied to PSRs performing duties essentially the same as those found to be non-exempt by the Second Circuit in the Novartis case about which we previously reported.

Significantly, the Ninth Circuit also rejected arguments presented in a friend-of-the-court brief filed by the U.S. Labor Department.  The court said that the brief was not entitled to controlling deference, contrary to the position taken by the Second Circuit.

PSRs Were Selling

Adopting a common-sense approach to the exemption, the Ninth Circuit said that a "sale" in the pharmaceutical industry's context occurs with "the exchange of non-binding commitments" between a PSR and a physician by which "the manufacturer will provide an effective product [that] the doctor will appropriately prescribe."  "[F]or all practical purposes, this is a sale," the court said, noting that the "primary duty" of PSRs "is not promoting Glaxo's products in general or schooling physicians in drug development," but "causing a particular doctor to commit to prescribing more of the particular drugs in the PSR's drug bag," thus increasing company sales.

The Ninth Circuit rejected the PSRs' argument that they did not transfer any medications to physicians, such that they merely promoted Glaxo's products.  Instead, the court agreed with Glaxo that the phrase "other disposition" in the FLSA's definition of "sale" or "sell" is a "broad catch-all category" by which an employee is a salesperson if he or she "in some sense make[s] a sale."

No Deference to DOL's Brief

In another significant aspect of the ruling, the Ninth Circuit refused to give "controlling deference" to a brief filed by the U.S. Secretary of Labor supporting the PSRs' position.  First, the court criticized DOL's "outside salesman" exemption regulations, noting that, "instead of using its expertise and experience to formulate a regulation, [DOL] has elected merely to paraphrase the statutory language."  The court said that DOL's regulations contained mere "parroting" of the FLSA's definition of the term "sale." The court said, "This clarifies nothing about the meaning of [the FLSA's definition of "sale" or "sell"]; it merely incorporates the very undefined, very un-delimited term" in the statute. 

Under those circumstances, the court concluded, deference to DOL's brief was not warranted:  "Rather than applying the regulation to the facts presented, the Secretary has used her appearance .  .  . to draft a new interpretation of the FLSA's language."  The court determined that it would be an undue expansion of deference to DOL "to accept the Secretary's offer, and give controlling deference even where there exists no meaningful regulatory language to interpret .  .  .."

The issues created by this split in the circuits might well have to be resolved by the U.S. Supreme Court.

◊   Have a comment or something else to add?  Please use our comment feature below.

In a major decision with possible relevance outside of the pharmaceutical industry, the Second Circuit U.S. Court of Appeals (Connecticut, New York, and Vermont) gave strong deference to a U.S. Labor Department legal brief and overruled a lower court in deciding that Novartis's pharmaceutical sales reps were not exempt from overtime as outside salespersons or as administrative employees under the federal Fair Labor Standards Act or applicable state laws.  On the same day, the Second Circuit also summarily ruled against Schering in a similar case.

The exemption status of pharmaceutical sales reps (who frequently earn substantial compensation) has been hotly litigated with varying results in recent years.  Consider the following unofficial scorecard:  By our count, prior to the Novartis decision, pharmaceutical companies had an 86% win rate (6 out of 7 cases) in federal district court decisions finding that the FLSA's administrative exemption was applicable.  Pharmaceutical companies had a 71% win rate (12 out of 17 cases) in federal district court decisions finding that the FLSA outside-sales exemption applied to their sales reps.  Many of those cases are on appeal.

On February 2 and March 24, 2010, the Third Circuit (Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands) found that a pharmaceutical sales rep at Johnson & Johnson and sales reps at AstraZeneca were exempt under the administrative exemption.  The court did not rule on the FLSA's outside-sales exemption.

The unique, highly-regulated circumstances of the pharmaceutical-sales environment has contributed to the split among the courts deciding these cases, particularly the fact that federal regulations bar the consummation of a sale between a pharmaceutical sales rep and a physician.  As the Second Circuit highlighted in finding that Novartis's reps were not primarily engaged in "making sales" but instead merely promoted drugs to physicians, (1) they could only give free samples; (2) they could not lawfully transfer drug ownership in exchange for anything of value; (3) they could not lawfully take an order for the purchase of drugs; and (4) they could not obtain a physician's binding commitment to prescribe drugs.  Even though the physician is widely considered to be the "linchpin" in the process of choosing drugs to prescribe, federal regulations bar the consummation of a sale between a pharmaceutical sales rep and a physician – the court concluded that fully consummated sales by pharmaceutical companies are made to wholesalers, rather than to physicians.

Several other courts (including the lower court in Novartis's case) have taken a "common sense" approach and held that the pharmaceutical sales reps "make sales in the sense that sales are made in the pharmaceutical industry" and thus qualified for the FLSA's outside-sales exemption.  Moreover, the Novartis lower court found that sales reps were not "robots" or "automatons," as they contended, but that instead they exercised judgment in tailoring presentations to physicians and qualified for the FLSA's administrative exemption.

The Second Circuit disagreed as to both exemptions.  Significantly, the Circuit was heavily influenced by the DOL's interpretations in DOL's friend-of-the-court legal brief supporting the sales reps.  The court believed itself required to grant "controlling deference" to the brief because the DOL's interpretations were not "plainly erroneous or inconsistent with the [DOL's] regulation" on the issues.

These wage-hour battles in the pharmaceutical field are not over, but some of the lessons for employers in any industry include these:

•   Beware so-called "outside sales" employees who are not really making sales within the meaning of the FLSA's outside-sales exemption (such as those who only promote products or services that are actually sold by others).

•   Beware "promotion" or "marketing" employees who are not exercising "discretion and independent judgment in matters of significance" within the meaning of the FLSA's administrative exemption but are instead exercising only "skill in applying well-established techniques, procedures, or specific standards."

•    Because DOL guidance documents and legal briefs can affect the outcome of litigation, think ahead about how DOL might be expected to interpret FLSA exemption rules in the future.

UPDATE 7/23/10:  On July 19, 2010 the U.S. District Court for the District of New Jersey ruled for the employer in Jackson v. Alpharma, Inc., finding that the pharmaceutical sales representatives there were exempt under the FLSA's administrative exemption.  The District of New Jersey is within the Third Circuit, and the court therefore followed the Circuit's February decision in Smith v. Johnson & Johnson which applied the administrative exemption to a pharmaceutical sales rep.

The Jackson court chose not to address the outside sales exemption.  Interestingly, the court also said, "in light of the Third Circuit's clear opinion in Smith .  .  ., the Court does not find it necessary to discuss" the Second Circuit's more-recent Novartis decision.  Further, the court did not mention DOL's amicus brief which was filed in the Novartis appeal and which the Second Circuit said was entitled to "controlling deference" on the administrative exemption in a similar setting.  As Jackson shows, pharmaceutical companies continue to fare better (in terms of percentages) with the FLSA's administrative exemption than with the outside sales exemption.

UPDATE 8/21/10:  In Christopher v. SmithKline Beecham Corp. d/b/a GlaxoSmithKline, 9th Cir., No. 10-15257, the U.S. Labor Department has filed a "Friend of the Court" brief urging the U.S. Court of Appeals to overturn a lower court's finding that Glaxosmithkline pharmaceutical sales representatives qualified for the FLSA's "outside salesman" exemption.

◊   Have a comment or something else to add?  Please use our comment feature below.