U.S. Supreme Court Resolves Split Among the Circuit Courts Regarding Whether Pharmaceutical Sales Representatives Are Entitled to Overtime

We previously blogged about the split among the Circuit courts and state court decisions regarding whether pharmaceutical sales representatives are outside sales employees and therefore exempt from the overtime requirements of the Fair Labor Standards Act (“FLSA”). The Second Circuit held that they were not, but the Ninth Circuit held that they were. On April 16, 2012, the Supreme Court heard argument on the appeal of the Ninth Circuit’s decision and issued its opinion on June 18, 2012. In Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156, 2161 (2012), the Supreme Court was faced with the question of whether the term “outside salesman,” as defined by the Department of Labor (“DOL”) regulations, encompasses pharmaceutical sales representatives whose primary duty is to obtain nonbinding commitments from physicians to prescribe their employer’s prescription drugs in appropriate cases.

The Petitioners worked as sales representatives for SmithKline Beecham and, as such, were responsible for calling on physicians in an assigned sales territory to discuss the features, benefits and risks of an assigned portfolio of their employer’s prescription drugs. Petitioners’ primary objective was to obtain a nonbinding commitment from the physician to prescribe their employer’s drugs in appropriate cases and the training Petitioners received underscored the importance of that objective. Christopher, 132 S. Ct. at 2164. Petitioners spent about 40 hours each week in the field calling on doctors during normal business hours of about 8:30 am to 5 pm. In addition, Petitioners spent an additional 10 to 20 hours each week attending events, reviewing product information, returning phone calls, responding to emails, and performing other miscellaneous tasks. Petitioners were not required to punch a clock or report their hours and they were subject to only minimal supervision. Petitioners were paid both a base salary and incentive pay based on the sales volume or market share of their assigned drugs in their assigned sales territories. Petitioners were not paid time and a half for time worked in excess of 40 hours per week. Id.

The DOL first announced its view that pharmaceutical detailers, like Petitioners, were not exempt “outside salesmen” in an amicus brief filed in the Second Circuit in 2009 and again in subsequent cases including in this case before the Ninth Circuit. Although the DOL’s position has remained unchanged, the reasoning in support of its position has changed. Initially, the DOL took the view that “a ‘sale’ for the purposes of the outside sales exemption requires a consummated transaction directly involving the employee for whom the exemption is sought,” but subsequently after the Supreme Court granted certiorari in Christopher, the DOL took the position that “[a]n employee does not make a ‘sale’ for purposes of the ‘outside salesman’ exemption unless he actually transfers title to the property at issue.” Christopher, 132 S. Ct. at 2165-66.

The majority opinion written by Justice Alito, and joined by Chief Justice Roberts and Justices Thomas, Scalia and Kennedy, found the DOL’s interpretation of its regulations “quite unpersuasive” because the interpretation was inconsistent with the FLSA which defines “sale” to mean a “consignment for sale.” See Christopher, 132 S. Ct. at 2169. Relying on the phrase “other disposition” in the definition of a “sale,” the majority held that phrase included “those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.” 132 S. Ct. at 2171-72. Given their interpretation of “other disposition,” the majority concluded that it follows that Petitioners made sales for purposes of the FLSA and therefore are exempt outside salesmen within the meaning of the DOL’s regulations. 132 S. Ct. at 2172. Obtaining a nonbinding commitment from a physician to prescribe one of their employer’s drugs is the most Petitioners were able to do to ensure the eventual disposition of the products that their employer sells. This kind of arrangement, in the unique regulatory environment within which pharmaceutical companies must operate, comfortably falls within the catchall category of “other disposition.” Id.

The dissent, written by Justice Breyer and joined by Justices Ginsburg, Sotomayor and Kagan, disagreed that an independent examination of the language of the FLSA and related DOL regulations, required the conclusion that Petitioners were “outside salesmen.” See Christopher, 132 S. Ct. at 2175. The dissent considered Petitioners’ work to be more naturally categorized as involving “[p]romotional activities designed to stimulate sales … made by someone else,” e.g., the pharmacist or the wholesaler, than as involving “[p]romotional activities designed to stimulate” the detailer’s “own sales.” Id. at 2177. The important factor for the dissent was that Petitioners do not obtain binding commitments, and therefore they were not making “sales.” See id. at 2179.

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