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During Monday’s hour-long oral argument, the justices engaged in lively questioning over the application of the exemption in the pharmaceutical industry. One important point of discussion revolved around the PSRs’ ability to obtain assurances from doctors to prescribe their drugs. Attorney Thomas Goldstein represented the PSRs and argued that because PSRs do not receive binding or written commitments from physicians to prescribe medications, they do not engage in sales under Section 3(k) of the FLSA. While Chief Justice Roberts agreed that physicians merely tell the PSRs that they will consider using their products in relevant medical situations, Justice Scalia raised the point that the particularities of selling in the pharmaceutical industry should be taken into account, noting that “these people look like salesmen to me.” Respondent SmithKlineBeecham’s counsel, former Solicitor General Paul Clement, argued that the PSRs in fact are engaged in “sales” because they obtain binding commitments from doctors and that these commitments can be oral. Mr. Clement further argued that extending the DOL’s position to the industry as a whole would end in an illogical result as pharmaceutical sales representatives selling medical devices to doctors would be exempt, but representatives selling drugs would not.

Faced with massive and unexpected liability – estimated by many to be in the billions – the justices also expressed concerns over DOL’s use of amicus briefs to declare new policies. Justice Breyer questioned whether the Secretary of Labor even weighed in before the new position was advanced by the lawyers in the Solicitor’s Office of the DOL. He further indicated that the DOL should have first engaged in administrative notice-and-comment rulemaking, giving all affected parties notice before changing course on the exempt status of the PSRs. Justice Scalia asked whether it was the DOL’s policy making program to “run around the country” and make new regulations through amicus briefing. Department of Justice Deputy Solicitor General Malcolm Stewart, arguing on behalf of the United States, admitted that the DOL had received a request for an opinion letter in 2007, inquiring as to whether PSRs were outside salesmen, but that it never responded. Justice Scalia stated that he found it “extraordinary” that the DOL was going to come in – without engaging in any prior enforcement actions or issuing any agency guidance on the issue – and proclaim that 90,000 people are now owed retroactive overtime. One final point made by Mr. Clement – and echoed by Justice Ginsburg – was that, even if it is found that the PSRs do not meet the outside sales exemption requirements, the issue is not fully resolved as the position could still qualify for the administrative exemption under the FLSA. The application of the administrative exemption is not currently at issue before the Supreme Court.

This case has far reaching implications as there are over 90,000 PSRs employed by the pharmaceutical industry. In addition, the case will likely have a broader impact on the manner in which an agency can announce new positions. A decision is expected by the end of June. We will prepare a complete analysis of the decision once it is issued.

To learn more about the case and its potential implications for employers, please see Littler's ASAP, Supreme Court to Decide Significant Case on the Outside Sales Overtime Exemption, by Richard Black and Bradley Strawn.

Photo credit: Schulte Productions

Under section 3(k) of the FLSA, a “sale” includes “any sale, exchange, contract to sell, consignment for sale, shipment for sale or other disposition.” The DOL’s regulations elaborate that sales “include the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property.”

Another relevant DOL regulation distinguishes sales work from “promotion work.” Under the regulations, promotion work is a type of activity:

often performed by persons who make sales, which may or may not be exempt outside sales work, depending upon the circumstances under which it is performed. Promotional work that is actually performed incidental to and in conjunction with an employee’s own outside sales or solicitations is exempt work. On the other hand, promotional work that is incidental to sales made, or to be made, by someone else is not exempt outside sales work. An employee who does not satisfy the requirements of this subpart may still qualify as an exempt employee under other subparts of this rule.

There has been a split among the courts, most notably the Ninth and Second Circuits, as to whether pharmaceutical representatives’ activities constitute sales because PSRs are prohibited by law from directly selling pharmaceuticals to physicians. The DOL has consistently taken the position that PSRs do not qualify for the outside sales exemption because they do not transfer ownership or property. The Second Circuit relied heavily on and agreed with the DOL’s interpretation and assessment in a 2010 decision.

In contrast, in Christopher v. SmithKline Beecham Corp., the Ninth Circuit declined to give deference to the DOL’s “current interpretation of the regulations.” In addition to noting the district court’s refusal to consider the DOL’s interpretation because it was “inconsistent with the statutory language and its prior pronouncements, [and] [] also def[ying] common sense," the Ninth Circuit reviewed prior Supreme Court decisions on the issue and stated, among other things, that the Secretary’s interpretation of an unambiguous statute by “an opinion letter, enforcement guidelines, or the like . . . is merely ‘entitled to respect’ to the extent the interpretation has the ‘power to persuade’ the court.”

The DOL’s amicus brief did not persuade the Ninth Circuit, which concluded that PSRs did, in fact, qualify for the outside sales exemption. Specifically, the Ninth Circuit reasoned that:

Plaintiffs' contention that they do not "sell" to doctors ignores the structure and realities of the heavily regulated pharmaceutical industry. It is undisputed that federal law prohibits pharmaceutical manufacturers from directly selling prescription medications to patients. Plaintiffs suggest that despite being hired for their sales experience, being trained in sales methods, encouraging physicians to prescribe their products, and receiving commission-based compensation tied to sales, their job cannot "in some sense" be called selling. This view ignores the reality of the nature of the work of detailers, as it has been carried out for decades.

As for the DOL’s distinction between “selling” and “promoting,” the appellate court stated that such a distinction “is only meaningful if the employee does not engage in any activities that constitute ‘selling’ under the Act.” The court further reasoned that:

PSRs are driven by their own ambition and rewarded with commissions when their efforts generate new sales. They receive their commissions in lieu of overtime and enjoy a largely autonomous work-life outside of an office. The pharmaceutical industry's representatives — detail men and women — share many more similarities than differences with their colleagues in other sales fields, and we hold that they are exempt from the FLSA overtime-pay requirement.

The Supreme Court’s decision is expected to not only resolve the numerous class and collective actions that have challenged the outside sales exemption in the pharmaceutical industry, but also to provide clarity as to the appropriate deference owed to the DOL’s opinions as expressed in amicus briefs and similar interpretive position statements.

The court determined the promotional work performed by the “sales” representatives was “not a duty directly related to Schering’s management or general business operations . . .,” adopting the Second Circuit’s analysis in In re Novartis Wage and Hour Litigation. Having already found that the “sales” representatives do not consummate sales, the court then concluded that, “neither do they design the promotional materials to be used in their sales calls . . . nor develop the ‘core message’ to be delivered during meetings with health care professionals . . . ." Likewise, while the sales representatives “helped drive Schering’s market share . . . they did so by promoting products to specific physicians in a set territory, not by marketing Schering products generally.” Schering’s representatives “use the core messages and promotional strategies developed by marketing teams; they do not develop those messages themselves or set overall market strategies.” For these reasons, their primary duty did not directly relate to Schering’s management or general business operations, and failed the second part of the test for the administrative exemption.

Schering’s sales representatives also came up short on the third part of the test for exempt administrative status according to the court. Relying once more on the Second Circuit’s decision in Novartis, supra, the trial court concluded that the discretion Schering permitted its sales representatives did not extend beyond “day to day duties” to “matters of significance.”

Thus, the sales representatives could adjust their interactions with individual physicians based on what they found to be the most effective approach. And they were not required to always deliver the same “core message” to each physician, nor to execute their sales calls according to a set script. But Schering did not permit sales representatives to present any information that had not been approved by and received from Schering. Nor were sales representatives allowed to develop their own core message, “but were instead instructed by Schering on how to deliver a core message that had been developed by a Schering marketing team . . . ." Schering set the overall market strategy for particular products, and while the sales representatives had the ability to call on doctors who were not on the target list generated by Schering, they were required to call on each doctor on that target list.

As a result of these constraints, “any discretion that Plaintiffs exercised fell within the bounds of the strategic plan and core message developed by Schering, rather than developed by Plaintiffs themselves; . . . they had no role in planning market strategy or the core message . . . ."

The court’s ruling is a further example of the unsettled state of the law on the status of pharmaceutical industry representatives. The Second Circuit’s Novartis case charts one course, determining that realities “on the ground” in the highly regulated pharmaceutical industry are insufficient to call for any industry specific analysis of what it means to make a “sale.” Meanwhile, the Ninth Circuit, in its decision in Christopher v. SmithKline Beecham, stakes out a different path with its conclusion that a “commonsensical” interpretation of the term “sale” in the pharmaceutical industry calls for a conclusion that sales representatives performing their jobs in ways much like that of their industry colleagues at Schering, qualify for the outside sales exemption.

Photo credit: Schulte Productions