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<!–:en–>SUPREME COURT CONSIDERING FLSA SALES EXEMPTION<!–:–>

April 18, 2012

Lawyers representing a pharmaceutical manufacturer and sales representatives who encourage doctors to prescribe the use of the company’s products squared off on April 16 before the U.S. Supreme Court, but they and a deputy solicitor general faced active and sometimes skeptical questioning about the Fair Labor Standards Act’s outside sales exemption and an appropriate interpretation of the act (Christopher v. SmithKlineBeecham Corp. d/b/a GlaxoSmithKline, U.S., No. 11-204, oral argument
4/16/12).

Justice Ruth Bader Ginsburg acknowledged that Michael Christopher and other “detailers” or pharmaceutical sales representatives claim they regularly work more than 40 hours per workweek without receiving overtime compensation, and their work includes dining or golfing with physicians in an effort to encourage them to write prescriptions for GSK medications. But she asked the employee’s lawyer, Thomas C. Goldstein of Goldstein & Russell in Washington, D.C., “If you’re right, would the time on the golf course get time and a half?”

Chief Justice John G. Roberts questioned Paul D. Clement of Bancroft PLLC in Washington, D.C., who argued for the company, about GSK’s argument that an employee engages in sales work by securing a commitment that the doctor will consider use of a medication when an appropriate patient need arises. Roberts asked if the same physician gave the same response to a competing representative, “Are those two sales or no sales?”

Deputy Solicitor General Malcolm L. Stewart, who represented the federal government as an amicus curiae supporting the employees, was pressed on the Labor Department’s actions on the outside sales exemption. Several justices questioned the government’s filing amicus briefs on the status of pharmaceutical sales representatives, rather than engaging in rulemaking to clarify the rights of employees engaged in an industry sales process that Justice Antonin Scalia called “peculiar.”

The argument arose on review of a February 2011 decision by the U.S. Court of Appeals for the Ninth Circuit, which held that the FLSA’s outside sales exemption barred the overtime claims of a proposed class of drug sales representatives for GlaxoSmithKline (635 F.3d 383, 17 WH Cases 2d 353 (9th Cir. 2011).

The Ninth Circuit declined to defer to DOL’s position that the exemption did not cover the drug sales representatives because their job was to promote their company’s drugs, not to make final sales. The agency’s view was expressed in an amicus brief in the
appellate court.

In July 2010, the Second Circuit had reached the opposite conclusion, holding that drug sales representatives for Novartis Pharmaceuticals Corp. and Schering Corp. were not FLSA-exempt and could pursue overtime claims under the federal wage and hour law (611 F.3d 141, 16 WH Cases 2d 481 (2d Cir. 2010)).

The Supreme Court denied Novartis’s and Schering’s petitions to review the Second Circuit decision, but the high court granted Christopher’s petition to review the Ninth Circuit ruling.

SmithKline Beecham, doing business as GlaxoSmithKline, and now known as GlaxoSmithKline LLC, argued that the Ninth
Circuit ruling was correct. However, the company acquiesced in the petition for Supreme Court review, acknowledging that “the issues are important, the circuits are badly divided, and [SmithKline] and the pharmaceutical industry more broadly need a clear and uniform answer to the questions presented.”

FLSA’s Section 13(a)(1) exempts from the law’s overtime requirements any employee who works “in the capacity of outside salesman (as such terms are defined and delimited from time to time by regulations of the [labor] secretary).”

Section 3(k) of the act provides that “sale” or “sell” under the statute “includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

DOL has issued regulations on the outside sales exemption, stating that “sales” within the meaning of the FLSA include “the transfer of title to tangible property, and in certain cases, of intangible … property.” The regulations also repeat the text of Section 3(k) of the act. In another FLSA regulation discussing “promotion work,” the Labor Department stated that “promotional work that is incidental to sales made, or to be made, by someone else is not exempt outside sales work.”

In its amicus briefs submitted both to the Second and Ninth circuits, the Labor Department said the FLSA and its own regulations support a holding that drug firm sales representatives, who promote their firm’s products and encourage physicians to prescribe them, are not covered by the outside sales exemption because they never in any sense make a sale.

The Second Circuit decided in Novartis that it should defer to DOL’s “reasonable” interpretation of its own regulations, but the Ninth Circuit in SmithKline rejected deference, characterizing the labor secretary’s amicus brief as a “reinterpretation” of the FLSA and as “plainly erroneous and inconsistent” with the FLSA regulations.

The Ninth Circuit then interpreted the FLSA exemption on its own and concluded that drug firm sales reps are “outside salesmen” because their in-person promotional efforts are intended to culminate in sales of the prescription drugs they present to physicians.

Goldstein explained to the court that while pharmaceutical representatives spend considerable effort convincing doctors about the merits of products, “the pharmaceutical company sells its products … to pharmaceutical wholesalers, which sell them to pharmacies … which sell them to customers, which have a relationship with a doctor, who may or may not have met with a detailer.”

“There is a sale here in this industry,” but it is to a wholesaler, not to the physician who met with a “detailer” or sales representative, Goldstein argued.

Scalia, drawing laughter with a remark that his law clerks “supplement my sparse life experience,” said one clerk had described salesmen selling frames who secure commitments to buy frames in the future, rather than immediate orders. “Now, is that a sale?”
Scalia asked.

Goldstein said the hypothetical did describe a sale but distinguished that scenario from the current case. Because it is unlawful for pharmaceutical reps to sell drugs directly to physicians, drug reps get no more than a response that doctors will consider drugs for
patient use in the future if and when the medication would be appropriate for a particular patient. A physician cannot make a commitment to write a prescription in the future, Goldstein said, because it would be “illegal as a matter of law.”

But Scalia said “there is a commitment.” Industry representatives, the justice suggested, are “trying to get … a commitment to consider this drug if it’s appropriate for patients in the future. That’s a commitment.”

Stewart, arguing the government’s position in support of the employees, said DOL regulations have provided since 1949 that a sale within the meaning of Section 203(k), defining “sale” or “sell,” includes a transfer of title. Justice Sonia Sotomayor said the
government’s brief to the Supreme Court appeared to suggest a “rigid test,” but she pointed out that Section 203(k) also includes a “consignment for sale” within the definition of a sale. “So what is the government’s position?” the justice asked.

The deputy solicitor general said “it would have been more precise to say that there has to be a transfer of possession in contemplation of a transfer of title.”

Answering questions about DOL’s regulations posed by Justice Elena Kagan, Stewart said that “if the relevant sales are, as we believe, GSK’s sales to—the transfer of drugs to—wholesalers and pharmacies in return for consideration, the detailers don’t play an essential role in the consummation of those sales. They don’t participate in those sales.”

Kagan responded, “But that seems a little bit blind to the way the industry actually works. The way this industry actually works is the real work is done by the detailer getting the doctor to say, ‘yeah, I’m going to start prescribing this where it’s medically appropriate.’ The actual sales from the company to the pharmacy just follows from however successful the detailer is.”

Justice Stephen G. Breyer noted that a DOL guidance on the outside sales issue dated to 1940, when an agency publication that became known as the Stein report described employees’ work as sales whenever they “in some sense make a sale.” But Breyer observed that the parties have estimated there are presently tens of thousands of people employed in the United States as detailers or pharmacy sales representatives, “and there’s a history of 75 years of nobody said anything.”

Breyer said that if the agency was going to reverse its position on the exempt status of such a number of employees, “the right way to do it is to have notice and comment, hearings, allow people to present their point of view, and then make some rules or
determine what should happen.”

Justice Anthony M. Kennedy expressed his own concern about the lack of rulemaking on the issue. “[I]nstead of doing
a regulation, amended regulation, as Justice Breyer indicates, you’re filing amicus briefs quietly in different courts. It seems to me that’s not nearly as fair or straightforward or as candid as an agency ought to be,” Kennedy said.

Scalia called it “extraordinary” that DOL would “come in and say: ‘Oh, you have been in violation of the law in the past, and you’re going to have to pay a lot of money for all these people who you didn’t give overtime to in the past.’ ”

Clement began his argument on behalf of the company by asserting that the two sales representatives who initiated the lawsuit were hired and trained for a sales job, attended sales conferences, had sales territories, and have been evaluated and compensated as sales people.

But Roberts said, “Your long list sort of stopped one step short. They don’t make sales.”

Clement argued the representatives make sales “in some sense,” which he said “is the practical construction the agency has always put on the sales requirement.”

Sotomayor questioned whether accepting that argument would mean “every promotional person will be a salesman,” but Clement argued that in order for an employee to be FLSA-exempt, the worker would have to have exempt sales work as a primary duty/

Ginsburg asked whether GSK had also argued that the pharmacy sales representatives were overtime-exempt under the FLSA as administrative employees. Clement said the company did so, but the administrative exemption is not before the Supreme Court because the trial court granted the employer summary judgment on the sales exemption and did not have to rule on the administrative employee exemption.

Ginsburg asked if that issue would remain open if GSK lost its case on the outside sales exemption. Clement said it would be open, although he said resolving the administrative exemption involves an argument that employees following scripted statements—because of industry concern about Food and Drug Administration prosecutions for off-label uses of medicines—no longer exercise the judgment and discretion required to be administrative employees.

“The problem,” Clement said, “is the Labor Department, instead of looking at this and making a rational judgment about labor policy and whether these individuals who make $93,000 … should rationally be the kind of workers that are protected by the Fair Labor Standards Act, instead, they’re looking at things that have everything to do with FDA regulation and nothing to do with labor policy.”

Clement urged the justices to consider carefully the negative consequences of imposing liability on the pharmaceutical industry.

“You have massive liability, between 4 and 6 years of effective time and a half, because of the way that the statute works. It has time and a half plus liquidated damages. You are talking about people who are very well paid, close to six figures. So unlike the classic worker who you might think is covered by the FLSA, who is a relatively low hourly worker, the amounts of damages here are quite significant.”

A decision in the case is expected by the end of the court’s term, in late June.    04.18.2012