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June 18, 2012-U. S. Supreme Court Decision regarding Pharmaceutical Salesmen

On June 18, 2012 the U. S. Supreme Court issued an opinion in the case captioned: Christopher et. al, v. SmithKline Beecham, Corp., DBA GlaxoSmithKline, 567 U. S. _____ (2012); 2012 WL 2196779 (U.S.). The Court resolved a long standing dispute regarding whether pharmaceutical sales representatives ( aka “detailers”) are properly classified as exempt employees. The Court held that sales representatives are properly classified as exempt employees, despite the U. S. Department of Labor’s (hereinafter “DOL”) interpretation of their own regulations to the contrary.


This decision is crucial for the pharmaceutical industry for several reasons. First, pharmaceutical companies have designated their outside sales representatives as exempt employees for over 70 years. Second, there are approximately 90,000 pharmaceutical sales representatives across the country that this decision could have impacted if the Court had found that the sales representatives were non exempt employees. Third, although this decision concerned pharmaceutical sales representatives, a different decision may have been reached for sales representatives in a different industry. The Petitioners in this case were hired by Respondent in 2003 as pharmaceutical detailers. They both worked for the company approximately 4 years. They were responsible for calling on physicians in assigned sales territories to discuss the features, benefits and risks of an assigned portfolio of the Respondent’s prescription drugs. The Petitioners’ objective was to obtain a nonbinding commitment from the physicians they serviced to prescribe1 drugs in their respective portfolios in appropriate cases to their patients. Once the physicians wrote the prescriptions, retail pharmacies sold the drugs to the patients.


The Petitioners worked long hours. Typically Petitioners worked a normal 40 hour week meeting with various physicians every day. They also worked an additional 10 to 20 hours per week attending various functions and activities to boost their respective sales. Each Petitioner received a base salary as well as incentive pay based upon their sales. They both averaged approximately $75,000 annually in pay. The Petitioners filed an action alleging that Respondent violated provisions of the Fair Labor Standards Act (hereinafter “FLSA”) by failing to pay them overtime wages during weeks when they each worked more than 40 hours. The case was filed in the U. S. District Court for the District of Arizona. Respondent filed a Motion for Summary Judgment arguing that the statute which exempts outside salesmen applied2. The District Court agreed and the Court of Appeals for the Ninth Circuit affirmed the decision. One of the major issues raised by the Petitioners and the DOL3 was whether the Courts should 1 The prescription drug industry is subject to extensive federal regulation, including the requirement that prescription drugs be dispended only upon a physician’s prescription. In light of this requirement, pharmaceutical companies have long focused their direct marketing efforts on physicians as opposed to retail pharmacies. 2 29 U.S.C. §213(a)(1). 3 The DOL filed an Amicus Curiae brief in this case. U.S. SUPREME COURT DETERMINES THAT PHARMACEUTICAL SALES REPRESENTATIVES ARE NOT ENTITLED TO RECEIVE OVERTIME PAY PER THE PROVISIONS OF THE FAIR LABOR STANDARDS ACT WHITE & WIGGINS, LLP provide “controlling deference”4 to the interpretation of the DOL’s regulations regarding this issue.


The Ninth Circuit said “no” in this instance. In a similar case5, the Court of Appeals for the Second Circuit said “yes”. The U. S. Supreme Court granted certiorari to resolve this split, 565 U. S. _______ (2011). The FSLA requires employers to pay employees overtime wages, see 29 U. S. C. § 207 (a), but this requirement does not apply with respect to workers employed in the capacity of outside salesman, §213 (a) (1). Congress did not elaborate on the meaning of “outside salesman” in the above described statute and left it to the DOL to issue regulations regarding the issue. The Court initially addressed the question whether it needed to provide “controlling deference” to the DOL for its interpretation of its regulations which found that such outside sales representatives should be classified as non exempt employees. The Court said “no”. The Court had trouble accepting the argument that “controlling deference” should be given to the DOL on this issue. The first reason was because the agency just made that determination in 2009. The Court found it hard to give deference to a decision which had not gone through the proper channels of providing notice to members of the industry and allowing a comment period, which normally precedes such an interpretation of a regulation by a federal agency. The pharmaceutical industry had been classifying the detailers as exempt for over 70 years. The Court opined that “to give the agency’s interpretation in this circumstance ‘controlling deference’ would seriously undermine the principle that agencies should provide regulated parties ‘fair warning of the conduct [a regulation] prohibits or requires’”. Christopher at pp. 10-11. Second, the Court was not persuaded to give “controlling deference” since the DOL changed its position regarding the interpretation of the regulations while the case was proceeding through the district court and appellate process6. Ultimately the Court determined that providing “controlling deference” per these circumstances was not appropriate.


The Court next reviewed all of the statutory language contained in Section 29 U.S.C. §213 (a)(1) as well as the regulations promulgated by the DOL7. The ultimate question for the Court was whether the physicians’ nonbinding commitment to prescribe drugs from their detailer’s employer constitutes a “sale” per the statutory and regulatory provisions of the FSLA. The Court held, “yes”. The Court based its rationale on the fact that the provisions contained in the DOL’s regulations and the statute were not an exclusive list of what constitutes a “sale”. 29 USC §203(4) (k) provides the following definition: “’sale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition”. The Court noted that Congress included a broad catchall phrase “other disposition” in the statute. The statute did not define “disposition”. The Court disagreed with the interpretation of the DOL on this issue and opined that since the specific list of transactions preceded the phrase “other disposition” that seemed to represent an attempt to accommodate industry-by-industry variations in methods of selling commodities. Consequently, the Court held that a reasonable 4 Petitioners and the DOL relied upon the following case to support their position Auer v. Robbins, 519 U. S. 452 (1997). 5 In Re Novartis Wage and Hour Litigation, 611 F. 3d 141, the DOL filed an Amicus Curiae brief alleging that pharmaceutical detailers were non exempt outside salesmen. 6 During the District Court proceeding, “the DOL interpreted the regulation regarding a ‘sale’ and took the view that for purposes of the application of the outside sales exemption, it required a consummated transaction directly involving the employee for whom the exemption was sought”. During the appeal process, the DOL took the position that “an employee does not make a ‘sale’ for purposes of the ‘outside salesman’ exemption unless he actually transfers title to the property at issue.” Christopher at. p. 9. 7 29 CFR §§541.500, 541.501 and 541.503.interpretation of the phase allows for the types of transactions performed by the pharmaceutical detailers to be considered sales, and therefore the detailers could properly be considered exempt employees. As previously stated, the result may have been different based upon a different industry or sales practice. The designation of detailers as exempt employees was a longstanding practice within the pharmaceutical industry and had never really been challenged by the DOL. The Court seemed to place quite a bit of interpretation of the phase allows for the types of transactions performed by the pharmaceutical detailers to be considered sales, and therefore the detailers could properly be considered exempt employees. As previously stated, the result may have been different based upon a different industry or sales practice. The designation of detailers as exempt employees was a longstanding practice within the pharmaceutical industry and had never really been challenged by the DOL. The Court seemed to place quite a bit of emphasis on that fact as well as the failure of the DOL to provide notice to the industry that its interpretation would change abruptly in 2009. If you have concerns regarding whether your outside sales representatives should be considered exempt employees, the traditional analysis regarding exempt versus nonexempt employees still applies. This case will provide some insight, but should be considered carefully in light of this unique set of facts. For further information, please contact Camille Stearns Miller at (214) 665-4158 or cstearnsmiller@whitewiggins.com. The content of this Update is for informational purposes only and is not intended to constitute advertising, invite an attorney-client relationship or serve as a source for legal advice or services. Use of any information from this Update, or the sending of electronic mail from our website, DOES NOT create an attorney-client relationship. Because we are not providing legal advice through this Update, you should not rely on or act on any information contained herein for any purpose without seeking legal advice from a duly licensed attorney competent to practice law in your jurisdiction.