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Practitioners react to High Court’s ruling that FLSA’s outside sales exemption applies to pharmaceutical sales reps

June 20th, 2012  |  Lisa Milam-Perez

On Monday, June 18, a divided U.S. Supreme Court ruled that pharmaceutical sales representatives employed by SmithKline Beecham were exempt from overtime under the FLSA’s outside sales exemption, affirming a Ninth Circuit decision that upheld a lower court’s grant of summary judgment to the employer on the reps’ overtime pay claims. In so ruling, the High Court also held that the Department of Labor’s interpretation of the outside sales exemption was not entitled to deference.

A contentious issue resolved. The Supreme Court granted cert in Christopher v SmithKline Beecham Corp last November to consider the exempt status of pharmaceutical sales reps (PSRs), an issue that had divided the circuits. The Court previously declined to hear the contentious wage-hour issue when, in February 2011, Novartis asked that it review a Second Circuit ruling which held PSRs were not covered by either the FLSA’s administrative or outside sales exemption. In its unsuccessful cert petition, Novartis contended that the Second Circuit’s standard would undermine “the Congressionally created balance between exempt and nonexempt employees” and “disrupt[] a major American industry” in the process. The Novartis case ultimately resulted in a $99 million settlement that was given final court approval earlier this month. In settling the case, Sanford Wittels & Heisler, counsel for the plaintiffs, acknowledged they were “keenly aware” that a ruling against the pharmaceutical reps in the High Court would torpedo any monetary award in their case.

The Ninth Circuit decision below that was affirmed this week by the Supreme Court stood in direct contrast to Novartis. The Ninth Circuit had refused to give deference to a DOL amicus brief submitted in that case, which took the position that the outside sales exemption did not apply. For the past 70 years, the Secretary of Labor herself had, prior to Novartis, acquiesced to the notion that the work of PSRs was sales, the Ninth Circuit observed. The High Court in the Christopher case was not called upon to consider whether the reps satisfied the requirements of the FLSA’s administrative exemption. After Monday’s ruling that PSRs fell within the outside sales exemption, however, it’s largely a moot point.

Employment Law Daily tapped Will Anthony, a partner in the Hartford, Connecticut, office of Jackson Lewis (and member of the Employment Law Daily Advisory Board), and Adam Hansen, an associate at Minneapolis-based plaintiffs’ firm Nichols Kaster, to give their reactions to Monday’s ruling.

Sales, defined. In finding the outside sales exemption applied, the majority reasoned that in this closely regulated industry, the most that a PSR could do under federal law was to obtain a nonbinding commitment from a physician to prescribe the employer’s drugs; performing this function was the nearest they could get to actually effectuating a sale. “That may be so,” wrote Justice Breyer for the dissent, “but there is no ‘most they are able to do’ test.” He wrote further: “The law precludes ‘an entire industry . . . from selling its products in the ordinary manner.’ But the law might preclude an industry from selling its products through an outside salesman without thereby leading the legal term ‘outside salesman’ to apply to whatever is the next best thing.”

“I think the dissent misunderstands the DOL regulations and framework,” said Jackson Lewis’ Anthony. “The issue has never been the securing of a binding commitment. For example, what if a widget salesman who sells the widgets to customers from the back of his truck goes door to door for months without selling any widgets? Is he no longer exempt because he did not ‘consummate’ a sale or secure a ‘binding agreement’? Clearly not. Moreover, what ‘binding commitment’ is obtained when you place something for consignment? The answer is ‘none,’ as the majority points out.”

In the dissent’s view, the PSRs’ duties more closely matched promotional work, not sales. Anthony rejected this notion. “According to the regulations, a promoter is someone who either distributes product or service information as a general matter or one who seeks to pave the way for another person to close a sale. That is not what goes on in the pharma industry,” he said. “The individuals at issue here are the only individuals who interact with the only decision maker in the sales process. Licensed prescribers are the only ones who can decide whether a prescription medicine leaves a pharmacy’s shelf. Pharma reps are extensively trained in disease states, effective treatment of applicable medical conditions, insurance coverage issues, sales techniques, etc. Armed with that training, they interact with physicians to get them to prescribe their company’s medications when appropriate. It is no different than the widget salesman who asks the manufacturer to buy its widgets when a need for them arises or the window salesman who asks the customer to buy his windows when their windows need replacing.”

“The majority view simply recognizes the need to give an expansive definition a functional interpretation,” Anthony said. “The dissent attempts to give an unnecessarily restrictive and hyper-technical read of a very broad definition.”

From his vantage point as plaintiffs’ counsel, Hansen saw things differently. His succinct take: “The majority went to great lengths to circumvent the simple fact that pharma reps don’t sell—in fact can’t sell—drugs.”

Unfair surprise. The majority appeared to be swayed by the notion of an “unfair surprise”—that pharmaceutical companies would only now discover that their sales reps were meant to be paid overtime—and at considerable cost. “It appears to have been a factor in the Court’s decision,” Anthony agreed, “as it should have been.”

“Governmental agencies should not have a ‘gotcha’ approach to changing industry practices. Rather, agencies should address issues as they arise, solicit competing views, and publish guidance on how it will view an issue moving forward. Here, the DOL abandoned a reasoned approach by jumping into current litigation and attempting to influence courts with a poorly reasoned legal analysis of its own regulations. A much healthier approach would be to follow the Constitution’s due process framework of giving people notice of laws before holding them accountable.”

PSR wage suits moot? The Second Circuit’s Novartis decision is now moot — for several reasons, Anthony said. “The ruling was based almost entirely on the court’s decision to give deference to the DOL’s amicus brief. The Supreme Court’s ruling, including the dissent, makes it clear that the DOL was not entitled to any deference in this situation. Given that fact, it is hard to imagine the Second Circuit would decide the Novartis case in the same way as it previously did if given the chance. Secondly, since the decision makes clear that the duties performed by pharma reps meet the outside sales exemption, it does not make a difference if they meet the administrative exemption as companies only need one exemption to apply.”

“I believe the decision has industry-wide implications,” Anthony added, “because the focus of the decision was on the definition of a ‘sale’ within the meaning of the FLSA and it was interpreted in such a way to include all pharma reps who call on doctors for the purpose of influencing the physician to prescribe a particular medication when medically appropriate.”

Hansen agreed. “The Supreme Court did not take up the question of whether SmithKline pharma reps qualify for the administrative exemption, but the point is probably moot. Unless a group of employees can show that their job duties materially differed from the duties described in today’s opinion, lower courts will simply apply today’s ruling and find the employees exempt under the outside sales exemption.”

Deference to DOL. “This decision should be a wakeup call to the DOL and other agencies that attempting to create law by filing a brief will be tolerated only in limited circumstances,” Anthony said. “The Supreme Court wants laws made the old-fashioned way: by Congress or by agencies that go through the rulemaking process. The Court clearly criticized the DOL for taking a position that was inconsistent with its own regulations and also inconsistent with its previous briefs in this litigation.”

“It’s hard to know the long-term implications of today’s decision on the Court’s deference to agency action,” Hansen stated. “I do read the Court’s opinion, however, not as lightening an employer’s burden in proving an exemption applies, but rather lessening the degree of deference owed to the DOL in these kinds of circumstances.

“The majority was plainly unimpressed with the DOL’s reasoning, to say nothing of what the Court perceived as the agency’s shifting justifications for its conclusion,” Hansen continued, in agreement with Anthony. “The Court still afforded the DOL Skidmore deference, but ultimately found the agency’s view unpersuasive. However, I think the Court’s approach still allows room for deference to future agency action when the unique factors at play in today’s decision are not present.”

Effect of agency inaction. “The only plausible explanation for the DOL’s inaction [in the past] is acquiescence,” according to the opinion, authored by Justice Alito for a majority clearly critical of the DOL’s recent amicus brief in the face of its historical silence on the matter. Anthony agreed with the majority’s statement but downplayed its significance to the Court’s reasoning. “Its decision was based more on giving the definition of a ‘sale’ its intended meaning — which is an expansive and functional meaning intended to recognize the different methods of accomplishing sales across different industries,” he observed.

Hansen rejected the Court’s conclusion. “But what I think is far more troubling is the implication that the lack of enforcement action by an agency is somehow evidence that a practice must be legal,” he said. “Companies violate the FLSA all the time. It seems silly to argue that unless a company is told that its pay practices are illegal, the company gets the benefit of the doubt. In fact, the presumption has been the opposite for over a generation. Companies without specific guidance as to their circumstances must prove (and therefore bear the risk) that an overtime exemption applies.”

Highly compensated employees. Justice Alito made reference to the fact that the PSRs generally earned more than $70,000 a year, a factor weighing in favor of exempt status, in his view. This begs the question: Does the “highly compensated employee” test established in 2004 have any teeth? Courts are more than willing to allude to salaries far lower than the $100,000 threshold as a factor in determining an exemption applies.

Anthony didn’t read much into the majority’s reference to salary here, suggesting too that it was just one of a number of factors evaluated by the majority. “I think the Court was simply saying that these are highly compensated individuals that have all of the indicia of sales people, except that how the sale is accomplished is dissimilar from the norm because of industry regulations. In other words, they are the type of people one would typically be considered exempt from overtime but for the regulatory framework.”

The statement was merely dicta, Hansen noted, “but even on its own terms, I think the Court ignored important policies — perhaps the most important policies — underlying the FLSA, which is unfortunate.

“The FLSA’s minimum wage provision was meant to protect the lowest-paid workers in our economy, but the overtime provision was meant to achieve something different,” Hansen said. “The legislative history of the overtime provision shows its two-fold purpose: to prevent workers who, perhaps out of desperation, are willing to work abnormally long hours from taking jobs away from workers who prefer shorter hours; and to spread available work among a larger number of workers and thereby reduce unemployment. And these policies are equally relevant whether someone makes minimum wage or $100,000 a year. It is Congress’ judgment that it’s better for a company to employ two people for 40 hours a week instead of one person for 80 hours a week. These policies are as relevant now as they have ever been since 1938, and it’s unfortunate that the Court failed to recognize them here.

“Unfortunately, the FLSA is particularly fertile ground for gut-level, jury nullification arguments that a person doesn’t deserve overtime because she’s well compensated,” Hansen acknowledged. “These arguments work, in part, because the primary victim of the overtime violation isn’t always the plaintiff. Often the victim is the empty chair — the person who is unemployed and looking for work, and not a party to the suit.”