The Supreme Court ruled 5-4 that pharmaceutical sales representatives, whose primary duty is to obtain nonbinding commitments from physicians to prescribe their employer’s prescription drugs, qualify as outside salesmen for purposes of the Fair Labor Standards Act’s (FLSA) outside sales exemption. Christopher v. SmithKlineBeecham Corp. d/b/a GlaxoSmithKline, __ U.S. __, No. 11- 204 (June 18, 2012). The majority made the following notable points:

  • The Department of Labor’s (DOL) interpretation of its own regulations was not entitled to deference here because its interpretation would impose potentially “massive” liability on an employer for conduct that occurred well before the DOL announced its interpretation.
  • The FLSA’s text “counsels in favor of a functional, rather than formal, inquiry, one that views an employee’s responsibilities in the context of a particular industry in which the employee works.”
  • The statutory definition of “sale” includes the phrase “other disposition,” a broad catchall that includes “those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.”

This case arose out of SmithKline Beecham Corporation’s failure to pay two pharmaceutical sales representatives overtime under the FLSA. SmithKline Beecham Corporation develops, manufactures, and sells prescription drugs. Because extensive federal regulation requires that prescription drugs be dispensed only upon a physician’s prescription, pharmaceutical companies, including SmithKline Beecham, focus their direct marketing efforts on medical practitioners with authority to prescribe those drugs. The pharmaceutical sales representatives in this case were responsible for calling on physicians in an assigned sales territory to discuss the features, benefits, and risks of an assigned portfolio of the company’s prescription drugs. Their primary objective was to obtain a nonbinding commitment from the physician to prescribe those drugs in appropriate cases. They spent about 40 hours each week in the field calling on physicians during normal business hours. Outside of normal business hours, they spent an additional 10 to 20 hours each week attending events, reviewing product information, returning phone calls, responding to emails, and performing other miscellaneous tasks. The employees were well compensated including through uncapped incentive pay. However, they were not paid overtime under the FLSA for hours worked in excess of 40 hours per week.

The employees brought suit in the U.S. District Court for the District of Arizona, alleging that SmithKline Beecham violated the FLSA by failing to compensate them for overtime, and sought backpay and liquidated damages. The district court granted the employer’s motion for summary judgment on the basis that the employees were exempt outside salesmen. The district court also denied the employees’ motion to alter or amend the judgment, rejecting the argument that the district court failed to accord appropriate deference to DOL interpretation of the pertinent regulations (an interpretation announced in an uninvited amicus brief DOL filed in a similar action then pending).

The Ninth Circuit affirmed the district court, agreeing that the DOL’s interpretation was not entitled to controlling deference. The Supreme Court granted certiorari to resolve the split between the Ninth Circuit’s ruling and the Second Circuit’s decision in In re Novartis Wage and Hour Litigation, 611 F.3d 141 (2d Cir. 2010), which held that the DOL’s interpretation was entitled to controlling deference.  

A 5-4 majority of the Supreme Court now affirmed the Ninth Circuit and held that “outside salesman” encompasses the petitioning pharmaceutical sales representatives.

Disposing first of any obligation to defer to DOL’s interpretation, the majority explained that while courts ordinarily defer to an agency’s interpretation of its own ambiguous regulation, even when that interpretation is announced in a legal brief, deference is not appropriate in all cases. In this case, the Court saw strong reasons to withhold deference, because the agency’s interpretation would impose potentially “massive” liability on an employer for conduct that occurred well before the DOL announced its interpretation. According to the Court, until 2009 the pharmaceutical industry had little reason to suspect that its longstanding practice of treating sales representatives as exempt violated the FLSA; the statute and regulations “certainly do not provide clear notice of this.” Moreover, the DOL never initiated any enforcement actions or otherwise suggested that it thought the industry was acting unlawfully. As a result, the Court found that to defer to the agency’s interpretation here would “seriously undermine” the principle that agencies should provide regulated parties with “fair warning,” and would constitute “unfair surprise.” The Court also found the DOL’s interpretation unpersuasive in its own right, and thus rejected it.

Reverting to “traditional tools of interpretation,” the Court looked to the text of the FLSA and the relevant DOL regulations. According to the majority, the statute itself provides an “interpretive clue” in that its emphasis on the “capacity” of the employee “counsels in favor of a functional, rather than formal, inquiry, one that views an employee’s responsibilities in the context of a particular industry in which the employee works.”  

Turning then to the relevant DOL regulations, the Court relied primarily on the general regulation, § 541.500, which defines “employee employed in the capacity of outside salesman” in relevant part to mean “any employee…[w]hose primary duty is…making sales within the meaning of [29 U.S.C. § 203(k)]” and “[w]ho is customarily and regularly engaged away from the employer’s place or places of business in performing such primary duty.” The referenced statutory provision, 29 U.S.C. § 203(k), states that “ ‘[s]ale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” The Court noted that the verb “includes” indicates that the examples enumerated in the text are intended to be illustrative, not exhaustive. As well, it took the use of the modifier “any” to mean “one or some indiscriminately or whatever kind.” Finally, it read “other disposition” as a broad catchall, including “those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.”

Thus, the majority concluded that the employees in this case made sales for the purposes of the FLSA and therefore are exempt outside salesmen within the meaning of the DOL’s regulations. Because obtaining a nonbinding commitment from the physician to prescribe the company’s drugs is “the most that petitioners were able to do ensure the eventual disposition of the products[, t]his kind of arrangement, in the unique regulatory environment within which pharmaceutical companies must operate, comfortably falls within the catch all category of ‘other disposition.’” The fact that the petitioners “bear all of the external indicia of salesmen” – sales experience, training, working away from the office, minimal supervision, incentive compensation – bolstered this conclusion. Moreover, the Court observed that “[i]t would be anomalous to require respondent to compensate petitioners for overtime, while at the same time exempting employees who function identically to petitioners in every respect except that they sell physicianadministered drugs…that are ordered by the physician directly.” Finally, the Court found that its conclusion comported with the apparent purpose of the FLSA’s exemption for outside salesmen; the petitioners are “hardly the kind of employees that the FLSA was intended to protect.”

As a result, the Court concluded that the pharmaceutical sales representatives qualify as outside salesman for the purposes of the FLSA, under the “most reasonable interpretation” of the DOL regulations.  

Justice Breyer dissented, joined by Justices Ginsburg, Sotomayor, and Kagan.