Law Journal Newsletters, July 7, 2010 – 2nd Circuit Finds Novartis Drug Reps Not Exempt From Overtime Law

By Mark Hamblett

Current and former sales representatives for Novartis Pharmaceuticals Corp. are not exempt from qualifying for overtime under the Fair Labor Standards Act, the 2nd U.S. Circuit Court of Appeals ruled Tuesday.

Adopting an interpretation of the law urged by the U.S. Department of Labor, the circuit reinstated the claims of some 2,500 plaintiffs who argued they should be paid overtime for working in excess of 40 hours per week. One lawyer for the plaintiffs estimated that damages could be in the area of $100 million.

The panel vacated a lower court’s ruling in the consolidated actions of In re Novartis Wage and Hour Litigation, 09-0437-cv. The appeal was decided by 2nd Circuit Judges Amalya L. Kearse and Peter W. Hall and, sitting by designation, Southern District of New York Judge Jed S. Rakoff. Kearse wrote for the panel.

It was the second major loss for Novartis in federal court in New York in less than two months. In May, a Southern District of New York jury found the company discriminated against women employees in pay, promotion and on the basis of pregnancy. Compensatory damages were awarded for 12 name plaintiffs, which are a template for possibly thousands more, and the company was hit with $250 million in punitive damages.

The wage-and-hour ruling covers employees of Novartis in New York, California and other states who brought suits that were consolidated in New York by the Judicial Panel on Multidistrict Litigation. The plaintiffs claim they were underpaid by being denied time and a half for each hour worked over 40 hours a week at various times between March 23, 2000, and April 7, 2007.

Novartis sells its drugs to wholesalers, who in turn sell them to pharmacies, who sell them to patients for whom doctors have written prescriptions.

The plaintiffs are Novartis representatives who cannot “sell” the drugs directly to doctors, but they make regular “calls” that usually last about five minutes and inquire whether the doctors will prescribe Novartis’ pharmaceuticals to their patients. The representatives, who work nine-hour days, are instructed by the company on four “social styles” that help them interact with physicians and tailor their approach to a specific physician’s social style.

The Fair Labor Standards Act of 1938, 29 U.S.C. §201, requires that employees be paid overtime for more than 40 hours worked per week but it sets out an exemption for “outside” salespeople and “administrative” employees.

Novartis claimed these exemptions from the act and from similar state law provisions in moving for summary judgment before Southern District Judge Paul A. Crotty.

Crotty found in 2009 that the representatives were exempt because they were outside salespersons. He held that, even though the representatives might not “sell” in a “technical” sense, excluding them from the exemption would “ignore the act’s spirit, purpose, and goals” (593 F.Supp.2d 637).

Crotty also credited the fact that representatives receive commissions — bonuses are paid when a certain number of pharmaceuticals are sold in their operating area — and they work with minimal supervision.

And even if they were not outside salespeople, Crotty said they would still qualify as administrative employees because “they engage in work that is directly related to the management or general business operations” of the company and “exercise discretion and independent judgment” on significant matters.

LABOR DEPARTMENT POSITION

At the circuit, the Labor Department weighed in with an amicus, with Secretary of Labor Hilda L. Solis saying that, because the representatives do not make sales or obtain orders, they are not salespeople, and because they do not exercise discretion and independent judgment, they are not administrative employees.

The Labor Department also said its regulations defining a “sale,” including 29 C.F.R. §541.501(b), are consistent with the terms of the act.

Judge Kearse said the secretary of labor’s regulations “define and delimit the terms used in the statute” and the “secretary’s interpretations are entitled to ‘controlling’ deference.”

“The position taken by the Secretary on this appeal is that when an employee promotes to a physician a pharmaceutical that may thereafter be purchased by a patient from a pharmacy if the physician — who cannot lawfully give a binding commitment to do so — prescribes it, the employee does not in any sense make a sale,” Kearse said. “Thus, the interpretation of the regulations given by the secretary is entirely consistent with the regulations.”

Kearse agreed, saying that, where an employee promotes a drug to a doctor, but can transfer no more than free samples of the drug and cannot lawfully transfer anything of value, cannot take an order for the drug and cannot “even obtain from the physician a binding commitment to prescribe it,” he or she has not made a sale.

The circuit concluded by agreeing with Solis that the administrative exemption does not apply because the regulations “require a showing of a greater degree of discretion and more authority to use independent judgment in matters of significance than Novartis allows” the representatives, Kearse said.

Jeremy Heisler of Sanford Wittels & Heisler in Washington, D.C., represents the plaintiffs. He said the 2nd Circuit’s ruling could have an impact on other wage litigation brought by pharmaceutical sales reps in other jurisdictions.

“The decision is important because it is the first federal appellate ruling on both the outside sales exception and the administrative employees exception as applied to pharmaceutical sales reps,” Heisler said. “The effect of the decision is not only to reverse the trial court’s grant of summary judgment against the pharmaceutical reps, but to hold, in effect, that Novartis is liable to pay the reps overtime.”

Richard H. Schnadig of Vedder Price in Chicago represents Novartis.

A Novartis spokeswoman said in a statement that the company is disappointed in the decision and is considering its options. Novartis said the trial court correctly held that the “sales representatives are both exempt outside sales persons and exempt administrative employees under the Fair Labor Standards Act (FLSA) and the related New York and California state laws,” the statement said. “[Novartis] is firmly committed to compensating all employees according to the FLSA and applicable state laws.”

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