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Supreme Court: Pharmaceutical Sales Representatives Qualify for “Outside Sales” Exemption

Labor & Employment Law and Health Law Alert

On June 18, 2012, the U.S. Supreme Court handed down its long-awaited decision in the Christopher v. SmithKline Beecham Corporation case (No. 11-204). In a 5-4 decision, the Court held that pharmaceutical sales representatives ("PSRs") qualify as "outside sales representatives" and are, therefore, exempt from the Fair Labor Standards Act's minimum wage and overtime requirements. The majority, led by Justice Alito, found that the Department of Labor's ("DOL") amicus briefs (which argued that PSRs did not make "sales" within the meaning of the regulations) were not entitled to deference, and were not persuasive. The Court also found that, to qualify as an "outside salesman" under the FLSA, PSRs did not necessarily have to make sales that resulted in a transfer of title to property. Rather, PSRs' practice of obtaining nonbinding commitments from physicians to prescribe the respondent's drugs when appropriate for patient care, was sufficient. The Supreme Court's decision is certainly good news for pharmaceutical companies, but it may also prove helpful to employers who employ sales representatives in other industries. Moreover, the Supreme Court's refusal to consider the DOL's interpretation of the outside sales exemption, because it was formed outside of the regulatory process, offers some much-needed predictability to employers who rely on the plain meaning of the DOL's regulations when making classification (and other wage and hour) decisions relating to their workforce.

Analysis

One way that pharmaceutical companies promote their products is by assigning PSRs to visit prescribers to share information about drug products in an effort to encourage the prescriber to write prescriptions for their brand when appropriate for patient care. The petitioners in this case were PSRs employed by SmithKline Beecham Corporation. The petitioners spent around 40 hours in the field calling on physicians, where their primary objective was to obtain a nonbinding commitment from physicians to prescribe SmithKline's products in appropriate cases. The petitioners spent an additional 10 to 20 hours attending events and performing other miscellaneous tasks, but did not receive overtime pay when they worked more than 40 hours per week. However, the petitioners were well compensated for their efforts, and their gross pay included both a base salary and incentive pay.

The petitioners filed suit, alleging that their employer violated the FLSA by failing to compensate them for overtime. SmithKline moved for summary judgment, arguing that petitioners were "employed in the capacity of outside salesman," because their primary duty was making sales, and therefore were exempt from the FLSA's minimum wage and overtime requirements under 29 U.S.C. § 213(a)(1). The District Court agreed and granted summary judgment for SmithKline. The petitioners challenged the District Court's decision, contending that it had erred in failing to accord controlling deference to the DOL's interpretation of the pertinent regulations, which the DOL had announced in an amicus brief filed in a similar action. The District Court rejected this argument and denied the motion. The Ninth Circuit agreed that the DOL's interpretation was not entitled to controlling deference and affirmed. On review, the Supreme Court affirmed, offering two key takeaways.

First, the Court considered the amount of deference that should be accorded to the DOL's amicus briefs, in which the Department had taken the relatively recent position that PSRs did not make "sales" within the meaning of the regulations because they did not actually transfer title to the property they were "selling." Pursuant to Auer v. Robbins, 519 U.S. 452 (1997), deference is inappropriate when the agency's interpretation is "plainly erroneous or inconsistent with the regulation," or when there is reason to suspect that the interpretation "does not reflect the agency's fair and considered judgment on the matter." Finding that the DOL's interpretation was not entitled to deference, the Supreme Court held that the DOL had acquiesced to this decades-long practice of classifying PSRs as exempt, and its present interpretation would impose potentially massive liability on SmithKline for conduct that occurred well before the interpretation was announced, creating the kind of "unfair surprise" the Court has warned against. The Supreme Court also held that the DOL's practice of announcing its interpretation through amicus briefs allowed no opportunity for public comment, and resulted in an interpretation that was "flatly inconsistent with the FLSA." Specifically, the Court closely examined what it means to "sell" in the context of the "outside sales" exemption, and determined that a "sale" does not require the transfer of title as the DOL had argued.

Second, the Supreme Court closely examined the regulations regarding the "outside sales" exemption, and found they favored a functional, not formal, inquiry, which viewed an employee's responsibilities in the context of the particular industry in which the employee works. From this, the Court took a broad view of the statutory definition of what constitutes a "sale," finding that its inclusion of "any sale…or other disposition," was broad enough to include PSRs' practice of obtaining nonbinding commitments from physicians to prescribe the respondent's drugs when appropriate for patient care, regardless of whether there was a formal transfer of title involved. Finally, the Court offered the following pointed dicta, which is illustrative of its view of whom the FLSA was intended (or not intended) to protect in this context: "Petitioners-each of whom earned an average of more than $70,000 per year and spent between 10 and 20 hours outside normal business hours each week performing work related to his assigned portfolio of drugs in his assigned sales territory-are hardly the kind of employees that the FLSA was intended to protect."

The decision is good news for pharmaceutical companies who face mounting pressure from less expensive generic drug offerings and who rely on PSRs as an important channel to disseminate information about the features, benefits and risks of the company's drug products to prescribers. The decision's clarifications regarding "outside sales" will also likely be helpful across the health care industry as manufacturers, distributors and providers continue efforts to reign-in costs in a competitive market.

From a broader employment perspective, this decision signifies an unwillingness on the part of the Supreme Court to permit the DOL to regulate through amicus briefs, which are not subject to public comment, particularly when the view expressed in those briefs is inconsistent with the DOL's enforcement actions over a lengthy period of time. It remains to be seen whether this will discourage the DOL from relying on amicus briefs or other "guidance" or interpretation issues outside the normal rulemaking process. Additionally, the Supreme Court's detailed examination of what constitutes "sales" in the "outside sales" exemption context provides additional clarity to employers in many industries who employ representatives whose primary duty is making sales, even if the "sale" in question is only a commitment to utilize the employer's product under specific circumstances.

For more information on this subject, employers should contact their local Quarles & Brady attorney.