Seventh Circuit Surprise: Appeals Court Finds Pharma Reps Exempt Under Administrative Exemption Without Waiting for Supreme Court
The Seventh Circuit ruled yesterday that pharmaceutical sales representatives (“PSRs”) for Eli Lilly & Co. and Abbott Laboratories Inc. are exempt from overtime under the Fair Labor Standards Act (“FLSA”) under the Administrative Exemption. The timing of the decision comes as a surprise in light of the fact that the exempt status of PSRs under the outside sales exemption is currently on review by the U.S. Supreme Court in Christopher v. SmithKline. The High Court’s decision in that case is not expected until at least next month.
The Seventh Circuit’s decision states that the plaintiff PSRs for both companies satisfy the administrative exemption “duties test” because they (1) perform work directly related to the general business operations of their employers, and (2) exercise independent judgment and discretion in carrying out that work.
With respect to the first prong of the test, the court relied on prior cases such as Roe-Midgett v. CC Services Inc., 512 F.3d 865 (7th Cir. 2008), and Reich v. John Alden Life Ins. Co., 126 F.3d 1 (1st Cir. 1997), which held that employees who act as representatives of the business to third parties are involved in “servicing” the business and are therefore administrative employees. The court stated that PSRs, “are the public face of their employer to the most important decision-maker regarding use of their companies’ products, the prescribing physicians” and thus their primary duty is administrative in nature.
The court went on to find that the PSRs at issue exercise independent judgment and discretion in their duties, despite the fact that the pharmaceutical industry is heavily regulated. Citing the extensive substantive training that PSRs receive with respect to the products they promote and the disease processes they treat, the Seventh Circuit found that the plaintiffs were not treated by the drug companies as “simple mouthpieces, reciting scripts.” The court stated that even determining “when the physician’s inquiry is sufficiently nuanced to require a response from a more knowledgeable representative” requires a “significant amount of discretion.” The court also found that PSRs exercise discretion in tailoring their conversations to the particular physicians with whom they meet.
Aside from the timing of the opinion, the Seventh Circuit’s decision is also somewhat surprising for what the court chose not to discuss. For example, the Seventh Circuit virtually ignored the amicus brief filed by the Department of Labor (“DOL”) in support of the Plaintiffs and the issue of whether and, if so, how much deference the court should give to the DOL's views. Addressing the DOL’s amicus position that PSRs do not qualify for the administrative exemption (previously adopted by the Second Circuit in Novartis) only in a footnote, the Seventh Circuit stated that the question of deference “might deserve significant attention if an interpretation of the regulations were in question.” In what can only be seen as a slap at the DOL, the court then concluded that the analysis of the administrative exemption required only “application of an unambiguous regulation” to the facts of the case.
The Seventh Circuit’s decision is important to employers primarily for two reasons. First, as we have previously stated on this Blog, if the Supreme Court were to rule in Christopher v. SmithKline that PSRs are not exempt under the outside sales exemption, the battleground over the exempt status of these employees would shift to the administrative exemption, an issue not raised in SmithKline. By joining the Third Circuit in Smith v. Johnson & Johnson and Baum v. AstraZeneca in finding that the administrative exemption does apply to PSRs, the Seventh Circuit has given the industry’s position a tremendous boost. Second, in yesterday’s decision, the Seventh Circuit interpreted the administrative exemption broadly as to both the “directly related” and discretion and independent judgment prongs of the duties test. This will be helpful to employers generally in defending against claims that they improperly applied the administrative exemption.
It is not yet clear whether the plaintiffs in the two cases decided yesterday will seek further review from the Seventh Circuit or Supreme Court. We will update our readers as events warrant.