At 10 a.m. EST today, the U.S. Supreme Court announced its decision to deny certiorari in Novartis Pharmaceuticals Corp. v. Lopes et al. This surprising pronouncement means that the Court will not review the controversial decision of the U.S. Court of Appeals for the Second Circuit, reported at 611 F.3d 141, ruling that pharmaceutical sales representatives for Novartis Pharmaceuticals Corporation do not meet the criteria for either the administrative or outside sales exemptions of the FLSA and are, thus, entitled to overtime pay for work in excess of 40 hours in a week. Giving controlling deference to an amicus curiae brief filed by the Department of Labor on behalf of the plaintiffs, the Second Circuit in Novartis held that because pharmaceutical sales representatives are prohibited under federal law from actually entering into contracts to sell their employer’s prescription drug products, they do not qualify for the outside sales exemption, despite long-standing DOL acquiescence in the consistent practice in this highly regulated industry of treating these sales representatives as exempt. The court also held that the highly regulated nature of the pharmaceutical industry prevented these employees from exercising “sufficient” independent judgment and discretion to qualify for the administrative exemption.
The Supreme Court also refused to review the decision in Kuzinski v. Schering Corp., 384 Fed. Appx. 17 (2d Cir. 2010), in which the Second Circuit relied on Novartis and affirmed a district court decision determining that pharmaceutical sales representatives for Schering Corporation are not exempt under the outside sales exemption.
The petition by Novartis to the Supreme Court sought review of the following questions: (1) whether the Second Circuit’s holding that highly-paid pharmaceutical sales representatives are not covered by the FLSA’s administrative exemption or the outside sales exemption, is contrary to the statute’s text, purpose, and the DOL’s long-standing regulations; and (2) whether an agency’s break with prior interpretations of its regulations, advanced for the first time in an amicus brief, is entitled to heightened deference under prior Supreme Court precedent. This case would have marked the first time that the Supreme Court squarely addressed the “duties test” requirements of any of the FLSA’s white collar exemptions in the seventy year history of the statute.
The Second Circuit’s decisions create a circuit split with respect to each of the issues presented by Novartis’s petition for Supreme Court review. The Second Circuit’s decisions are in conflict with the Third Circuit’s view of the administrative exemption, Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010) and Baum v. AstraZeneca, 372 Fed. Appx. 246 (3d Cir. 2010), cert. denied 131 S. Ct. 332 (2010); and with the Ninth Circuit’s view of the outside sales exemption and its decision to grant no deference to an amicus brief filed by the DOL, Christopher v. SmithKline, ___ F.3d ___ (9th Cir. Feb. 14, 2011).
The Administrative Exemption
Today’s denial of certiorari means that employers and courts must continue to operate without Supreme Court guidance with respect to the degree of discretion and independent judgment needed to qualify for the administrative exemption. The administrative exemption permits employers not to pay overtime to any employee who meets certain salary requirements, whose primary duty is office or non-manual work directly related to management or general business operations of the employer or the employer’s customers, and whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance. The Second Circuit’s decision in Novartis hinged on the last prong of this test. Although it was not disputed that Novartis’s sales representatives operated outside of their managers’ supervision the majority of the time and exercised some discretion in determining the order in which to visit particular physicians’ offices, how best to gain access to those offices, and how to allocate their budgets for promotional events, the Second Circuit deferred to the DOL’s position that this level of discretion – that the primary duties merely “involved” the exercise of discretion – was not sufficient to make these employees exempt because, in DOL’s opinion, a higher quantum of discretion is required. This decision conflicts with the Third Circuit’s earlier decision in Smith v. Johnson & Johnson, which held that the fact that pharmaceutical sales representatives for Johnson & Johnson “executed nearly all of [their] duties without direct oversight” and did so with some discretion and independent judgment compelled the conclusion that they satisfied the administrative exemption’s duties test.
The Outside Sales Exemption
The outside sales exemption applies to any employee “[w]hose primary duty is making sales.” Because federal law prohibits the sale of any prescription drug without the authorization of a licensed physician, pharmaceutical sales representatives cannot consummate a sale of any of their employer’s products. Rather, they visit with physicians, describing the features and benefits of those medications in an effort to obtain a non-binding commitment from the physician to prescribe the drug when medically appropriate. The Second Circuit held that such activities do not fit within the outside sales exemption because the term “sales” requires a transfer of title. This holding conflicts with the Ninth Circuit’s decision in Christopher, which held that the term “sales” must be interpreted broadly under a functional approach to include anyone who “in some sense” sells.
Deference to the DOL
The Supreme Court’s decision not to review Novartis also leaves an open question with respect to the degree of deference to be afforded to amicus briefs submitted by the DOL or other administrative agencies. The amicus brief at issue in Novartis is part of a larger strategy by the DOL – termed “ambush by amicus” by one pharmaceutical industry group – aimed at influencing the courts through the unsolicited submission of amicus briefs in cases it views as important. The Second Circuit held that the DOL’s interpretation of its own regulations in the brief was entitled to controlling deference. The decision issued two weeks ago by the Ninth Circuit in Christopher v. SmithKline, on the other hand, held that no deference is required in this circumstance because the amicus brief represents a departure from “pharmaceutical industry norms and the acquiescence of the Secretary [in the exempt classification of similar positions] over the last seventy-plus years.” The Ninth Circuit also held that the DOL’s regulations with respect to the outside sales exemption merely “paraphrase[s] the statutory language,” and the DOL has no “special authority to interpret its own words” in such cases.
The Road Ahead
The Supreme Court’s decision not to grant review of the Novartis decision will most directly affect the pharmaceutical industry, which continues to face uncertainty with respect to the exempt status of sales representatives, along with the possibility of considerable, retroactive liability if those employees are held to be non-exempt. Fortunately, under long-standing DOL rulings and decisions of a number of Courts of Appeal – most recently the 7th and 4th Circuits – any such overtime liability should be calculated at 50% of the regular rate of pay and not at 150% of that rate as plaintiffs generally seek.
The effects of the Supreme Court’s decision not to review the Novartis and Schering decisions, however, may be much broader. Employers in the insurance, consulting, financial services, and staffing industries, among many others, also currently classify broad segments of their workforce as administratively exempt. These industries are likely to see increased litigation over the exempt status of those employees. In addition, the Supreme Court’s decision not to evaluate the DOL’s “ambush by amicus” strategy makes it likely that the agency will increase its involvement in wage and hour litigation going forward as a means to change positions taken by prior administrations without time-consuming notice-and-comment rulemaking.
In a letter to the Supreme Court dated February 16, 2011, the plaintiffs in Novartis noted that the plaintiffs in the SmithKline case intend to seek en banc (full court) review of the Ninth Circuit’s decision. In addition, the Seventh Circuit has agreed to grant interlocutory review of another pharmaceutical sales representative exempt status decision, Schaefer-LaRose v. Eli Lilly & Co., 663 F. Supp. 2d 674 (S.D. Ind. 2009), in which the Southern District of Indiana ruled that sales representatives for Eli Lilly meet both the administrative and outside sales exemptions. Depending on whether the 9th Circuit grants en banc review and, if it does, how the full court rules, and how the 7th Circuit decides the Eli Lilly case, the Supreme Court is likely to face further petitions for review of these very important issues. For now, however, employers are left with contrary decisions in some circuits and uncertain results in those remaining circuits that have yet to address these issues.