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July 27, 2012

Supreme Court Rules Pharmaceutical Sales Representatives Exempt from Overtime Payments Under the Outside Sales Exemption of the Fair Labor Standards Act

On June 18, 2012, the United States Supreme Court ruled that the pharmaceutical sales representatives in Christopher v. SmithKline Beecham Corp., 567 U.S. __ (2012) who visit doctors' offices to promote (but not sell) their products are outside sales personnel exempt from federal overtime requirements. The Court's decision marks the first time the high court has ruled on any of the so-called white collar exemptions to the Fair Labor Standards Act (FLSA).

The FLSA generally requires employers to pay employees overtime wages, see 29 U.S.C. §207(a), but this obligation does not apply with respect to all employees. The statute exempts, among others, anyone "employed "¦ in the capacity of [an] outside salesman." 29 U.S.C. §213(a)(1). The Act, however, does not define the term "outside salesman." Instead, Congress delegated authority to the U.S. Department of Labor ("DOL") to issue regulations from time to time to define and delimit the term.

The case against SmithKline Beecham Corp., d/b/a GlaxoSmithKline (GSK), was brought by two men who worked for the company as pharmaceutical sales representatives – known as detailers – for nearly four years beginning in 2003. Detailers are responsible for calling on physicians in an assigned sales territory to discuss the features, benefits, and risks of certain prescription drugs. Their primary objective is not to sell, but to obtain non-binding commitments from physicians to prescribe the drugs. The former employees said in their class action lawsuit that they did not receive overtime for 10 to 20 hours worked each week, on average, outside the normal business day. More than a dozen similar cases had been filed against other pharmaceutical companies by workers charged with persuading doctors to prescribe the manufacturer's products.

In 2009, the Labor Department sided with the former GSK employees and took the view that a "sale" for the purposes of the outside sales exemption required a "consummated transaction" directly involving the employee for whom the exemption is sought. After the Court granted certiorari in this case, the DOL abandoned that view and narrowed its interpretation, contending that an employee does not make a "sale" unless he "actually transfers title to the property at issue."

GSK argued that the proposed class of its detailers qualified for the outside sales exemption since the representatives were trained in sales techniques, learning how to obtain non-binding commitments from doctors to prescribe the company's medicines, and also were paid both a base salary and incentive pay derived from the sales volume or market share of their assigned drugs in their assigned sales territories.

The case came to the Supreme Court on appeal from the Ninth Circuit. The Court of Appeals for the Ninth Circuit affirmed the District Court's grant of summary judgment to GSK and held that, because the commitment that petitioners obtained from physicians was the maximum possible under the rules applicable to the pharmaceutical industry, petitioners made sales within the meaning of the regulations. The Appeals Court found it significant "that the DOL had previously interpreted the regulations as requiring only that an employee 'in some sense' make a sale," and had "acquiesce[d] in the sales practices of the drug industry for over seventy years." The 2011 Ninth Circuit decision conflicted with a 2010 ruling by the Second Circuit that pharmaceutical sales representatives qualified for overtime under the FLSA and the Supreme Court granted certiorari to resolve the split among the federal circuits.

In a 5-4 decision written by Justice Samuel Alito, the Supreme Court affirmed the judgment of the Ninth Circuit, holding that pharmaceutical sales representatives – who are legally prohibited from closing sales – qualify as outside sales workers under the most reasonable interpretation of the DOL's regulations and are therefore exempt from the FLSA's overtime compensation requirement. The majority concluded that pharmaceutical detailers, who bear all of the external indicia of outside sales workers, act "in the capacity of a salesman," as the statute requires for the exemption to apply. In reaching its holding, the Court found that the statute's emphasis on "capacity" favors a functional, rather than a formal, inquiry and that employees' responsibilities should be viewed in the context of the particular industry in which they work. The justices also said that "when an entire industry is constrained by law or regulation from selling its products in the ordinary manner, an employee who functions in all relevant respects as an outside salesman should not be excluded from that category based on technicalities."

The Court found additional support in the DOL's regulations, including Section 541.500(a)(1) which defines an "outside salesman" as an employee whose primary duty is "making sales" and adopts the broad statutory definition of the term "sale." That definition, in turn, includes the broad catchall phrase "other disposition," which the majority said is "most reasonably interpreted as including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity." The Court added that the two GSK detailers, who earned an average of more than $70,000 per year and spent 10 to 20 hours outside normal business hours each week performing work related to their assigned portfolio of drugs in their assigned sales territory, are "hardly the kind of employees the FLSA was intended to protect."

Justice Alito also wrote that the Labor Department's most recent interpretation of its ambiguous regulations – invoked by both petitioners and DOL to impose potentially massive liability for conduct that occurred well before the interpretation was announced – "lack[ed] the hallmarks of thorough consideration," would result in "unfair surprise," was "quite unpersuasive" and not entitled to deference. Justice Breyer, in the dissenting opinion, agreed that the Solicitor General's interpretive view was not entitled to "any especially favorable weight."

The dissent rejected the majority's conclusion that the "[p]etitioners' end goal "¦ was to convince physicians actually to prescribe the drug in appropriate cases." They argued that the sales representatives promote rather than sell their company's medicines and determined that detailers fail to qualify as outside sales workers because their primary duty is informational as opposed to sales oriented.

Implications arising from the SmithKline decision. The GSK case was a bellwether, challenging a longstanding practice within the prescription drug industry of treating detailers as exempt employees and DOL overtime regulations that date back 70 years.

While the decision should bring a swift end to a number of FLSA lawsuits brought against various pharmaceutical companies, the ruling could also affect other industries because the Court focused on function rather than formality and placed great weight on the FLSA's language exempting those who are employed "in the capacity of an outside salesman." The justices, however, focused their ruling on the particular characteristics of the pharmaceutical industry, an industry subject to extensive federal regulation, which may limit the effect of the decision on other businesses.

The decision also has the potential to extend beyond employers' use of the outside sales exemption if lower courts take the same functional approach in interpreting other exemptions under the FLSA. The Supreme Court's rejection of an overly technical, formalistic reading of the FLSA, combined with the fact that the high court has not taken many FLSA cases, may ultimately impact how lower courts look at the statute. As a practical matter, the extent of the impact of the decision will not be known until lower courts begin citing the ruling.

If you have any questions or require our assistance in reviewing your policies or conducting management training, please contact the Hiscock & Barclay lawyer with whom you normally work or any attorney in our Labor & Employment practice area.


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