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SUPREME COURT TO REVIEW WHETHER PHARMACEUTICAL SALES REPS ARE EXEMPT UNDER FLSA

November 29, 2011

Granting a petition filed by pharmaceutical sales representatives seeking overtime pay, the U.S. Supreme Court on November 28, 2011 agreed to consider whether the Fair Labor Standards Act’s (FLSA) outside sales exemption covers drug sales representatives who visit doctors to encourage them to prescribe theiremployer’s prescription drugs (Christopher v. SmithKlineBeecham Corp. d/b/a GlaxoSmithKline, U.S., No. 11-204, cert. granted 11/28/11).

The court will review 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 statutory claims of a proposed class of drug sales representatives for GlaxoSmithKline (635 F.3d 383, 17 WH Cases2d 353 (9th Cir. 2011).

The appeals court declined to defer to the Labor Department’s position, stated in an amicus brief, 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 Second Circuit in July 2010 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 Cases2d 481 (2d Cir. 2010)).

The Supreme Court earlier this year denied Novartis’s and Schering’s petitions to review the Second Circuit decision.

In their petition for review, two GlaxoSmithKline sales representatives urged the Supreme Court to resolve the circuit split on the scope of the FLSA’s outside sales exemption. They also urged the justices to address what deference federal courts owe to the secretary of labor’s interpretations of the FLSA.

SmithKline did not oppose review, but rather agreed with the petitioners that the Supreme Court should clear up the “confusion and uncertainty” among the lower federal courts on whether the FLSA exemption applies to pharmaceutical sales representatives.

FLSA Section 13(a)(1), which is codified as 29 U.S.C. § 213(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).”

FLSA Section 3(k), codified as 29 U.S.C. § 203(k), provides that “sale” or “sell” under the statute “includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

The Labor Department has issued regulations defining the outside sales exemption, codified as 29 C.F.R. § 541.501(b), 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,” codified as 29 C.F.R. § 541.503(a), 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 brief 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 it should defer to DOL’s “reasonable” interpretation of its own regulations, but the Ninth Circuit in SmithKline rejected deference, characterizing the 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 the 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.

The petitioners said they are among “approximately 90,000” drug firm sales reps employed within the United States subject to a common industry practice of not paying overtime to sales reps who often work 10 to 20 hours beyond a 40-hour workweek. 11.20.2011