Wage & Hour Litigation Blog

Supreme Court To Decide Whether Pharmaceutical Sales Representatives Meet The FLSA’s Outside Sales Exemption

Posted in Misclassification/Exemptions

sup court seal.bmpCo-authored by Richard Alfred and Jessica Schauer

At 10 a.m. EST today, the U.S. Supreme Court announced its decision to grant certiorari in Christopher v. SmithKline Beecham Corp.  The Court will review a decision of the U.S. Court of Appeals for the Ninth Circuit, reported at 635 F.3d 38 (see Seyfarth Shaw’s Wage & Hour Litigation Blog), that held that pharmaceutical sales representatives are outside salespersons for purposes of the Fair Labor Standards Act and therefore are exempt from overtime.  The Plaintiffs’ petition, which SmithKline and the industry did not oppose, sought review of two issues:

(1) Whether deference is owed to an amicus brief submitted by the Department of Labor interpreting the outside sales exemption and

(2) Whether the outside sales exemption applies to pharmaceutical sales representatives.

While the Supreme Court’s docket does not yet indicate the specific issues on which the Court granted certiorari, it is most likely that it did so as to both of these issues.

The Ninth Circuit, in its rulings on these issues, rejected the “rigid, formalistic interpretation” of the term “sales” advocated by the plaintiffs and adopted by several other federal courts.  The court compared the plaintiff pharmaceutical sales representatives to other types of sales employees and found that they “share many more similarities than differences,” including the fact that they “are driven by their own ambition and rewarded with commissions when their efforts generate new sales.”  The Circuit Court also held that an amicus brief filed by the Department of Labor (“DOL”) on behalf of the plaintiffs was not entitled to deference.  The Ninth Circuit did not reach and the Supreme Court’s review will not consider the applicability of the administrative exemption to pharmaceutical sales representatives.

The Ninth Circuit’s decision is contrary to the Second Circuit’s 2010 decision in In re Novartis Wage and Hour Litigation, which raised similar issues as well as the applicability of the administrative exemption to pharmaceutical sales representatives (which the Second Circuit rejected).  In that case, the Second Circuit ruled that sales representatives for Novartis Pharmaceutical Corporation did not meet the criteria for either the outside sales of administrative exemptions.  Giving controlling deference to an amicus brief filed by the Department of Labor (“DOL”), the Second Circuit held that because pharmaceutical sales representatives are prohibited by federal law from actually entering into contracts to sell their employer’s products, they do not qualify for the outside sales exemption, which applies to employees “[w]hose primary duty is[] making sales.”  Several district courts, including the Northern District of Illinois, Southern District of Florida and District of Connecticut have also rejected application of the outside sales exemption to pharmaceutical sales representatives on similar grounds.  Those decisions, along with cases decided in favor of the application of one or both exemptions by the Southern District of Indiana, Eastern District of Texas, and Eastern District of Pennsylvania, are either currently on appeal to the Fifth or Seventh Circuits or are expected to be appealed.

Given a typical schedule for briefing and argument at the Supreme Court, a ruling on this case is not likely until late next spring. 

Deference to the DOL

The Supreme Court’s decision in this case is likely to focus on the degree of deference to be afforded to the amicus brief submitted by the DOL in support of the plaintiffs’ position before the Ninth Circuit.  The amicus brief at issue is part of a larger strategy by the DOL – referred to as “ambush by amicus” by one pharmaceutical industry group – aimed at influencing the courts through the unsolicited submission of amicus briefs in cases it views as important.  The Second Circuit in Novartis ruled that the DOL’s interpretation of its own regulations in the brief was entitled to controlling deference.  The Ninth Circuit, in stark contrast, held that no deference is required in this circumstance because the amicus brief represents a departure from “pharmaceutical industry norms[] and the acquiescence of the Secretary [in the exempt classification of similar positions] over the last  seventy-plus years.”  The Ninth Circuit also decided that the DOL’s regulations with respect to the outside sales exemption merely “paraphrase[s] the statutory language,” and that the DOL has no “special authority to interpret its own words” in such cases.

The Outside Sales Exemption

The outside sales exemption applies to any employee “[w]hose primary duty is[] making sales.”   Because federal law prohibits the sale of any prescription drug without the authorization of a licensed physician, pharmaceutical sales representatives cannot consummate a sale of any of their employer’s products.  Rather, they visit with physicians, describing the features and benefits of those medications in an effort to obtain a non-binding commitment from the physician to prescribe the drug when medically appropriate.  The Novartis court held that such activities do not fit within the outside sales exemption because the term “sales” requires a transfer of title, while the Ninth Circuit held that the term “sales” must be interpreted broadly under a functional approach to include anyone who “in some sense” sells.  The Supreme Court’s review of this issue should clarify the scope of the outside sales exemption for employers and the courts.

Effect of the Supreme Court’s Decision

The Supreme Court’s decision in Christopher v. SmithKline will most directly affect the pharmaceutical industry.  A decision by the Supreme Court on the scope of the outside sales exemption will also impact the ability of other employers to apply the functional approach to this exemption in determining whether employees are “making sales” where the final step of the sales process – closing the sale – is performed by others.  Such a decision will mark the first time that Court has endeavored to interpret this exemption in the more than seventy-year history of the FLSA.  A Supreme Court decision upholding the Ninth Circuit’s decision will effectively resolve the exempt status of pharmaceutical sales representatives for those companies whose sales representatives operate in a manner similar to SmithKline’s.  On the other hand, if the Supreme Court reverses the Ninth Circuit’s decision regarding the application of the outsides sales exemption, then pharmaceutical companies (and other employers whose exemption of “sales” employees depend on a functional approach to the outside sales exemption) will be left with the administrative exemption to support the exempt status of these employees.

Finally, the expected Supreme Court decision will also determine whether the DOL’s “ambush by amicus” strategy will succeed.  If the Court holds that the DOL’s amicus brief in Christopher is entitled to deference – even if it is not entitled to the very high level of deference afforded by the Second Circuit in Novartis – it is likely that the agency will increase its involvement in wage and hour litigation going forward as a means to attempt to change positions taken by prior administrations without time-consuming notice-and-comment rulemaking.  A Supreme Court decision siding with the Ninth Circuit on this issue will put an end to the DOL’s amicus strategy and require the agency to engage in proper rulemaking.

We will update our readers about this case as developments warrant.