On February 14, 2011, the U.S. Court of Appeals for the Ninth Circuit in Christopher v. SmithKline Beecham Corp. (Case No. 10-15257) affirmed a district court decision holding that that pharmaceutical sales representatives for GlaxoSmithKline (“Glaxo”) are exempt from overtime under the Fair Labor Standards Act (FLSA) because they qualify as “outside sales” employees. The decision creates an important split of authority in the courts of appeals, as the Second Circuit issued a contrary decision last year in In re Novartis Wage and Hour Litigation, 611 F.3d 141 (2d Cir. 2010).

Background

Federal law prohibits the sale of any prescription drug without the authorization of a licensed physician. Because of this regulatory scheme, end users of prescription drugs typically have very little say in choosing the drugs they purchase. Pharmaceutical companies’ sales efforts thus focus almost exclusively on physician prescribers. These companies typically employ “pharmaceutical sales representatives” who make “calls” on physicians to encourage them to prescribe their products to patients.

As is typical in the pharmaceutical industry, the Glaxo representatives at issue in Christopher, are each assigned a particular set of medications that they are responsible for inducing physicians in their own pre-set territory to prescribe. These pharmaceutical sales representatives must have prior sales experience and are extensively trained on sales techniques. In their meetings with physicians, they describe the features and benefits of the medications in their respective “drug bags” in an effort to obtain a non-binding commitment from the physician to prescribe the drug when medically appropriate. The pharmaceutical sales representatives receive commissions that are tied to the market share, sales volume, and dose volume of the drugs they promote.

Exempt Status Lawsuits

Standard industry practice is to classify pharmaceutical sales representatives as exempt from overtime under the FLSA pursuant to the outside sales and/or administrative exemptions. Recently, however, sales representatives from more than a dozen different pharmaceutical companies have brought suit seeking overtime and claiming that their job duties do not qualify them for these exemptions. These cases have had differing results.

Last summer, the Second Circuit held that pharmaceutical sales representatives for Novartis Pharmaceutical Corporation did not meet the criteria for either exemption. Giving controlling deference to an amicus brief filed by the Department of Labor (“DOL”) on behalf of the plaintiffs, the Second Circuit held that because pharmaceutical sales representatives are prohibited from actually entering into contracts to sell their employer’s products, they could not qualify for the outside sales exemption, which applies to employees “[w]hose primary duty is[] making sales.”

District courts that have addressed the issue have been divided, with courts in several districts, including the Southern District of Indiana and the Central District of California, holding that the outside sales exemption applies to pharmaceutical sales representatives, while the Northern District of Illinois and Southern District of Texas have held that it does not.

The Ninth Circuit’s Analysis

The Ninth Circuit affirmed the District of Arizona’s grant of summary judgment in favor of Glaxo, rejecting the “rigid, formalistic interpretation” of the term “sales” advocated by the DOL and espoused by the Second Circuit. Looking to the purpose of the outside sales exemption and language from the preamble to the 2004 version of the DOL’s exempt status regulations, which states that an outside salesperson is an employee who “in some sense” sells, the court determined that the term “sales” must be interpreted broadly. The Ninth Circuit also compared Glaxo’s pharmaceutical sales representatives to other types of sales employees and found that they “share many more similarities than differences” including the fact that they “are driven by their own ambition and rewarded with commissions when their efforts generate new sales.” These similarities demonstrated that the pharmaceutical sales representatives should be considered exempt outside salespersons.

In reaching this decision, the Ninth Circuit held that the amicus brief filed by the DOL was not entitled to deference for two reasons. First, the court held that the DOL regulation at issue merely “paraphrase[s] the statutory language,” and the DOL has no “special authority to interpret its own words” in such circumstances. The court also held that deference was not warranted 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.” Such regulation, “expressed only in ad hoc amicus filings, is not enough to overcome decades of DOL nonfeasance and the consistent message to employers that a salesman is someone who ‘in some sense” sells.”

Implications

Novartis has petitioned for Supreme Court review of the Second Circuit’s decision on this issue, and our best information is that the Court may consider that petition in conference as early as this Friday. The Ninth Circuit’s conflicting decision could influence the Court in considering that petition. In addition, the exempt status of pharmaceutical sales representatives under both the administrative and outside sales exemptions is currently on appeal to the Seventh Circuit but has not yet been briefed. Regardless of whether the Ninth Circuit’s reasoning is adopted more broadly, at a minimum pharmaceutical companies should find this decision helpful in arguing that they exercised good faith in classifying pharmaceutical sales representatives as exempt because of the decision’s emphasis on the DOL’s long history of acquiescence in this practice.