Posted June 20th, 2012.
By Marcia Coyle
The National Law Journal
Pharmaceutical companies scored a major victory this week when a divided U.S. Supreme Court held that the industry’s sales representatives are not eligible for overtime pay.
The Court, ruling 5-4 in Christopher v. SmithKline Beecham, found that the estimated 90,000 drug sales reps fell within the so-called “outside salesman” exemption from the minimum wage and maximum hours requirements of the Fair Labor Standards Act (FLSA).
“There are dozens of pending lawsuits now that will be dismissed as a result of this decision,” said Richard Alfred, chair of Seyfarth Shaw’s national wage and hour litigation practice. “The outside sales exemption, as a result of the Court’s analysis, is a much more powerful exemption.”
Alfred, who praised the ruling, predicted the decision will have an impact on any industry that employs people to sell in the context of what a sale means within that particular industry, and even though the employee might not actually close a transaction or be involved in the consummation of the actual sale to the ultimate customer, for example, insurance adjusters.
However, Jeremy Heisler of Sanford Wittels & Heisler, who won a wage-and-hour class action involving Novartis in the U.S. Court of Appeals for the Second Circuit, said the decision was “wrong, (and) continues this Court’s trend of favoring corporate interests over those of employees and consumers, and just violates the basic principle of overtime law that exceptions must be narrowly construed.”
Heisler said the decision “certainly injects uncertainty into the continued viability of the distinction between promoting and selling which has been around since the Department of Labor defined the outside sales exemption.” He said companies and employers will likely now argue that promotional employees are outside sales persons. That could include, for example, employees who solicit funds for charities, college recruiters and some in the retail industry.
The main duty of pharmaceutical sales reps is to obtain nonbinding commitments from doctors to prescribe their company’s prescription drugs in appropriate cases.
Congress did not define “outside salesman” in the FLSA but left it to the Department of Labor to do so through agency regulations. The department issued those regulations in 1938, 1940, 1949 and 2004. It never, however, brought an enforcement action against the drug companies on behalf of their sales reps.
Justice Samuel Alito Jr., writing for the majority, sharply criticized the department for first announcing its view that pharmaceutical reps are not exempt outside salesmen in an “uninvited” 2009 amicus brief submitted in the Novartis wage-and-hour litigation at the Second Circuit. The department also submitted similar amicus briefs in other cases.
He noted that the department argued successfully in the Second Circuit and unsuccessfully in the U.S. Court of Appeals for the Ninth Circuit that a “sale” for purposes of the exemption requires a “consummated transaction.” But the department changed course in the Supreme Court, he added, arguing that a sale requires actual transfer of title to the property at issue.
Alito refused to give deference to the department\’s interpretation, saying that interpretation would “impose potentially massive liability” on SmithKline for conduct that occurred long before the interpretation was announced. Deferring to that interpretation in this case, he added, “would seriously undermine the principle that agencies should provide regulated parties’ fair warning of the conduct [a regulation] prohibits or requires.”
The majority then examined the text of the law and found in the definition of “sale” clues to whether sales reps fall within the exemption. A catchall phrase, “other disposition,” represented an attempt to accommodate industry-by-industry variations in methods of selling products, wrote Alito.
Obtaining non-binding commitments from doctors, Alito said, is the kind of arrangement “in the unique regulatory environment within which pharmaceutical companies must operate” that “comfortably falls within the catchall category of ‘other disposition.'” Alito also noted that these sales reps earn on average more than $70,000 per year and spend 10-20 hours per week outside of their normal business preparing for their assigned territories — “hardly the kind of employees that the FLSA was intended to protect,” he wrote.
Justice Stephen Breyer dissented, joined by justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan. “Taken together, the statute, regulations, ethical codes, and Labor Department Reports indicate that the drug detailers do not promote their ‘own sales,’ but rather ‘sales made, or to be made, by someone else.’ Therefore, detailers are not ‘outside salesmen.'”
This article originally appeared in The National Law Journal.