In a decision that could have significant implications for employers in the pharmaceutical industry and beyond, on February 28, 2011, the Supreme Court of the United States denied Novartis Pharmaceuticals Corporation's petition for certiorari in Novartis Pharmaceuticals Corp. v. Lopes et al. The Supreme Court's denial of Novartis' petition leaves intact a 2010 decision by the Second Circuit Court of Appeals, which held that thousands of pharmaceutical sales representatives (PSRs) employed by Novartis were entitled to overtime pay under the Fair Labor Standards Act (FLSA), as well as under New York and California state laws.
The issue in the Novartis litigation was whether or not the plaintiffs -- all current or former PSRs employed by Novartis -- were entitled to overtime pay under the FLSA. Novartis argued that its PSRs fell within the FLSA's "outside sales" or "administrative" exemptions to overtime pay, and therefore were not entitled to overtime pay. The plaintiffs argued that they were non-exempt employees, and that Novartis therefore owed them overtime pay for hours worked in excess of 40 hours a week.
The District Court that first heard the case agreed with Novartis and granted summary judgment to the employer. The plaintiffs then appealed the decision to the Second Circuit, which reversed the lower court's ruling. Holding that Novartis' PSRs did not fall within either the "outside sales" or the "administrative" exemptions under the FLSA, the Second Circuit ruled that the PSRs were entitled to overtime pay.
Pharmaceutical Sales Representatives Do Not Fall Within the "Outside Sales" Exemption
With respect to the "outside sales" exemption, the Second Circuit noted that under Federal guidelines, Novartis cannot sell prescription drugs directly to patients. Rather, Novartis sells its drugs to wholesalers, which then sell the drugs to pharmacies that fill physicians' prescriptions and sell the drugs to patients. The role of Novartis' PSRs, thus, was not to sell drugs to doctors or patients. Rather, the PSRs' job duties were limited to very brief meetings with physicians to inform the doctors about Novartis prescription medications and encourage them to prescribe those products.
The Second Circuit pointed to an amicus curiae brief filed by the Secretary of Labor, which cited Department of Labor regulations providing that "outside salesmen" have the "primary duty of making sales." The Court noted that the regulations "make it clear that a person who merely promotes a product that will be sold by another person does not, in any sense intended by the regulations, make the sale."
Taking these factors into account, the Second Circuit found that the PSRs' promotional work with physicians was not "making sales" within the meaning of the FLSA's outside sales exemption, and therefore that the PSRs were entitled to overtime pay.
Pharmaceutical Sales Representatives Do Not Fall Within the "Administrative" Exemption
Department of Labor regulations provide that, in order for the FLSA's administrative exemption to apply, an employee's primary duty must "include the exercise of discretion and independent judgment with respect to matters of significance." The Second Circuit noted that this exercise of discretion and independent judgment "means more than simply the need to use skill in applying well-established techniques or procedures prescribed by the employer."
Reviewing the Novartis PSRs' job duties, the Second Circuit found that PSRs operated "within severe limits imposed by Novartis." For example, the PSRs had no role in planning Novartis' marketing strategy; no role in formulating the "core messages" they were expected to deliver to doctors; were required to visit doctors a certain number of times per trimester based on a schedule created by Novartis; were required to promote a given drug a certain number of times as established by Novartis; were not permitted to deviate at all from Novartis' promotional "core messages" when meeting with physicians; and were forbidden to answer any question posed by a physician that had not been specifically scripted for the PSRs during their training.
Given these facts, the Second Circuit determined that PSRs did not exercise independent judgment and discretion in matters of significance sufficient to qualify for the administrative exemption, and thus were entitled to overtime pay under the FLSA.
The Second Circuit's decision in the Novartis case runs counter to a long-standing practice by pharmaceutical companies of treating PSRs as exempt employees under the FLSA. It also runs counter to several decades of general acquiescence by the Department of Labor to this industry practice. It is worth noting, however, that Supreme Court's refusal to review the Second Circuit's Novartis decision leaves intact a split among the Circuit Courts on the issue of PSRs and overtime pay, as both the Third and Ninth Circuits have recently held that PSRs are exempt employees under the FLSA.
Notwithstanding the circuit split, the Supreme Court's denial of Novartis' petition for certiorari could have far-reaching implications for pharmaceutical companies and their employees, and opens the door to significant employer liability for unpaid overtime. This is especially the case for employers located in states that fall within the Second Circuit's jurisdiction.
Broadly speaking, the Novartis case also has implications for employers in other industries. First, the case seems to represent an increasingly narrow view of the FLSA's exemptions by courts and the Department of Labor. Second, employers can likely expect increased litigation initiated by employees challenging their classification as non-exempt workers. Moreover, for employers who hire sales representatives working in H-1B visas status, the Novartis case could open the door to liability for violations of federal regulations regarding payment of H-1B workers.
In light of the Novartis case, employers should review the exempt and non-exempt classification of their employees, paying particular attention to the classification of employees who perform promotional work, as well as those who may not qualify under the administrative exemption because their job duties do not require the exercise of sufficient discretion and independent judgment.