Wage and Hour Law Update : Wage & Hour Lawyer & Attorney : Jackson Lewis Law Firm : Minimum Wage, Overtime & Service Contracts

While the pharmaceutical industry is focused on the Supreme Court’s upcoming decision in Christopher, as to whether the work performed by pharmaceutical sales representatives (PSRs) for GlaxoSmithKline qualified for the outside sales exemption, another circuit court has weighed in on the duties of PSRs and their FLSA status in the context of the administrative exemption. The Seventh Circuit has joined the Third Circuit in finding that the PSRs’ work is administrative because it both qualifies as office or non-manual work related to the business operations of the pharmaceutical company, and requires the customary and regular exercise of discretion and independent judgment. Schaefer-Larose v. Eli Lilly & Co., 2012 U.S. App. LEXIS 9300 (7th Cir. 2012).

In the Seventh Circuit’s view, the work of Eli Lilly’s PSRs is related to the company’s general business operations because they are “the principal ongoing representatives of the company to the professional community that is in a unique position to make, or deny, a viable market for the company's product. They do not make individual sales of medications, but ensure, on a continuing basis, that the medical community is fully aware of the potential of the company's pharmaceutical  products and that the same community is confident that the company's products will be effective tools in the practical setting of a medical practice.” Because the company required the PSRs to possess a “solid understanding of the message that they were delivering if they were to fulfill their roles as the company's representative to the community of practicing physicians,” their work clearly entailed discretion and independent judgment. 

This favorable ruling, and the continually expanding body of legal decisions analyzing the exempt status of PSRs provides an interesting case study for both pharmaceutical industry employers as well as employers in other industries analyzing the exempt status of their sales force. Courts however continue to struggle with whether certain categories of sales and marketing work is “sales” work for purposes of the production/administration dichotomy and, if so, whether it can be administrative under DOL regulations. The Seventh Circuit has answered this question in the affirmative Id. at fn. 23.

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Despite the Circuit split created by this month’s decision from the Ninth Circuit, holding that pharmaceutical sales representatives are outside sales employees within the meaning of the FLSA, the Supreme Court has declined to take up Novartis’ appeal of the adverse ruling it received on this issue from the Second Circuit.  The Supreme Court’s ruling was contained in its Order List for February 28, and does not provide any insight into the Court’s thinking. 

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On February 14, 2010, the United States Court of Appeals for the Ninth Circuit held GlaxoSmithKline's pharmaceutical sales representatives (“PSRs”) are exempt from the FLSA's minimum wage and overtime requirements under the outside sales exemption, rejecting a contrary decision from the Second Circuit, and an amicus brief filed by the United States Department of Labor.  Christopher v. SmithKline Beecham Corp., 2011 U.S. App. LEXIS 2834 (9th Cir. Feb. 14, 2011).  The Ninth Circuit refused to defer to the DOL, finding the amicus brief was merely a new “reinterpretation” of the exemption by the DOL, set forth only in its amicus brief, not in any regulations, and constituted a break from pharmaceutical industry standards regarding what constitutes sales, which the DOL had not objected to since the FLSA’s inception decades ago.   According to the Ninth Circuit, “[i]n this industry, [a] ‘sale’ is the exchange of non-binding commitments between the PSR and physician at the end of a successful call. . . . [F]or all practical purposes, this is a sale.”  Id. at * 35 (emphasis added). 

Based on this Circuit split and the existing split between the Second and Third Circuits over the application of the administrative exemption to PSRs (not at issue in the Ninth Circuit decision), the Supreme Court may be more likely to weigh in on this issue.

We will continue to monitor developments surrounding this evolving issue.

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In the latest installment of the ongoing litigation over whether pharmaceutical sales representatives are exempt from overtime under the FLSA (see earlier post here), a district court in Indiana declined to reconsider its decision holding that PSRs do qualify for the outside sales exemption. See Schaefer-Larose v. Eli Lilly & Co., S..D. Ind. Docket No. 07-CV-1133, Order dated Sept. 29, 2010. 

The Court observed that “a substantial amount of activity has occurred in courts throughout the country with regard to the question of whether pharmaceutical sales representatives are exempt under the FLSA [since the court issued its decision holding that outside sales exemption applies].” Order at 2; Schaefer-Larose v. Eli Lilly & Co., 663 F. Supp. 2d 674 (S.D. Ind. 2009). While acknowledging that some of these rulings “do not correspond with our analysis” – including the Second Circuit’s recent Novartis decision – absent guidance from the relevant appeals court (the Seventh Circuit), the Court stated that its decision on the issue “cannot be a swinging pendulum, vacillating back and forth as each new ruling addressing this question is handed down by some court or another across the nation.” Id. at 3. 

The resolution of whether PSRs qualify for the outside sales or administrative exemption likely will ultimately need to be resolved by the United States Supreme Court.

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In a much-awaited decision, earlier this week  the U.S. Court of Appeals for the Second Circuit reversed a New York District Court and held that pharmaceutical sales representatives are not exempt outside sales or administrative employees.  In re Novartis Wage & Hour Litig., No. 09-0437-cv, 2010 U.S. App. LEXIS 13708 (2d Cir. July 6, 2010). The Court concurred with and deferred to the position of the U.S. Secretary of Labor, who appeared as amicus curiae or “friend of the court” at the appellate stage, and stated that  “the Secretary of Labor’s interpretations of her regulations are entitled to “‘controlling’ deference unless those interpretations are ‘plainly erroneous or inconsistent with the regulation.’”   In essence, the Second Circuit held that the representatives do not meet the outside sales exemption because “where [an] employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it[,] . . . it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.” In a similarly narrow interpretation of the FLSA, the Second Circuit, again deferring to the Secretary’s view, held that the representatives’ duties do not demonstrate the necessary exercise of independent discretion and judgment as to matters of significance for application of the administrative exemption, and performance of those duties required only skills gained through training

A petition for review likely will follow and the scope of the exemptions may need to be resolved by the U.S. Supreme Court, in light of conflicting authority including the Third Circuit’s contrary decision applying the administrative exemption to pharmaceutical sales representatives.  See Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010)

For a more detailed analysis of the Second Circuit’s decision, click here. 

[UPDATE].  On July 19, 2010, another district court within the Third Circuit relied on the Johnson & Johnson decision to hold that pharmaceutical sales representatives qualify for the administrative exemption.  Jackson v. Alpharma, 2010 U.S. Dist. LEXIS 72435 (D.N.J. July 19, 2010).  The ever-growing and sharply divided body of authority regarding applicability of the administrative exemption in the pharmaceutical industry make In Re Novartis a candidate for Supreme Court review.  We will continue to monitor developments in the case. 

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