Split U.S. Supreme Court Says Pharmaceutical Sales Reps Are Not Owed Overtime

Split U.S. Supreme Court Says Pharmaceutical Sales Reps Are Not Owed Overtime

WASHINGTON, D.C. - (Mealey's) A pharmaceutical sales representative, or detailer, falls under the U.S. Department of Labor's (DOL) definition of an "outside salesman" and is not owed overtime compensation, a split U.S. Supreme Court ruled June 18, rejecting the DOL's interpretation of its own regulations (Michael Shane Christopher, et al. v. SmithKline Beecham Corporation, dba GlaxoSmithKline, No. 11-204, U.S. Sup.). 

(Opinion. Document #73-120713-007Z.) 

"We find the DOL's interpretation of its regulations quite unpersuasive.  The interpretation to which we are now asked to defer-that a sale demands a transfer of title-plainly lacks the hallmarks of thorough consideration.  . . .  This new interpretation is flatly inconsistent with the FLSA [Fair Labor Standards Act], which defines 'sale' to mean, inter alia, a 'consignment for sale.'  A 'consignment for sale' does not involve the transfer of title. . . .  The DOL cannot salvage its interpretation by arguing that a 'consignment for sale' may eventually result in the transfer of title (from the consignor to the ultimate purchaser if the consignee in fact sells the good).  Much the same may be said about a physician's nonbinding commitment to prescribe a particular product in an appropriate case.  In that situation, too, agreement may eventually result in the transfer of title (from the manufacturer to a pharmacy and ultimately to the patient for whom the drug is prescribed)," Justice Samuel Anthony Alito Jr. wrote for the majority. 

The majority also rejected the sales reps' claim that they should be classified as nonexempt promotional employees who merely stimulate sales made by the others rather than as exempt outside salesmen.  "Petitioners' theory seems to be that an employee is properly classified as a nonexempt promotional employee whenever there is another employee who actually makes the sale in a technical sense.  But, taken to its extreme, petitioners' theory would require that we treat as a nonexempt promotional employee a manufacturer's representative who takes an order from a retailer but then transfers the order to a jobber's employee to be filled, or a car salesman who receives a commitment to buy but then asks his or her assistant to enter the order into the computer.  This formalistic approach would be difficult to reconcile with the broad language of the regulations and the statutory definition of 'sale,' and it is in significant tension with the DOL's past practice," Justice Alito added.  

Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Anthony M. Kennedy and Clarence Thomas joined in the opinion. 

Sales Calls 

GlaxoSmithKline hired Michael Christopher and Frank Buchanan as pharmaceutical sales reps (PSRs) in 2003.  Christopher was terminated in May 2007, and Buchanan left Glaxo when he accepted a PSR position at another pharmaceutical company. 

Glaxo uses its PSRs to call on physicians and encourage them to prescribe Glaxo products.  During the calls, PSRs provide the physicians with information about Glaxo's products and product samples and try to persuade the physicians to prescribe Glaxo products over competitors' products. 

PSRs usually work outside of a Glaxo office and spend most of their time traveling to see physicians.  Christopher and Buchanan visited eight to 10 physicians each day.  They claimed that they worked 10 to 20 hours extra per week and received no overtime wages.  When not visiting with physicians or traveling to and from their appointments, Christopher and Buchanan claimed, they were studying Glaxo products, preparing presentations, answering calls, checking email, generating reports and attending various events on evenings and weekends. 

Glaxo's PSRs receive two forms of pay:  a salary and incentive-based compensation.  The incentive-based compensation is paid if Glaxo's market share for a particular product increases in a PSR's territory, if sales volume for a product increases, if sales revenue increases or if the dose volume increases.  Glaxo aims to have 25 percent of a PSR's total compensation come from incentive-based pay.  However, incentive-based compensation is uncapped. 

Class Complaint 

Christopher and Buchanan filed a class complaint against Glaxo in the U.S. District Court for the District of Arizona in August 2008, seeking unpaid overtime.  Both parties moved for summary judgment, and the plaintiffs moved to certify a conditional class. 

The District Court granted Glaxo's motion for summary judgment, opining that PSRs "unmistakably fit within the terms and spirit of" the FLSA's outside sales exemption.  Christopher and Buchanan then moved to alter or amend the judgment based on the District Court's failure to consider an amicus brief filed by the U.S. secretary of Labor in an FLSA appeal that was pending at that time before the Second Circuit, In re Novartis Wage & Hour Litig. (611 F.3d 141 [2d Cir. 2010]).  The District Court rejected the plaintiffs' argument that the DOL brief was entitled to deference under either Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc. (467 U.S. 837 [1984]) or Auer v. Robbins (519 U.S. 452 [1997]).  Christopher and Buchanan appealed. 

Affirming the District Court's ruling, the Ninth Circuit panel opined in February 2011 that it must ignore the secretary of Labor's brief.  Christopher and Buchanan then petitioned the Supreme Court. 

Dissenting Opinion 

Justice Stephen G. Breyer filed an opinion dissenting from the majority.  He opined that the drug company employees in question do not fall under the DOL's "outside salesman" definition. 

"What the detailer does is inform the doctor about the nature of the manufacturer's drugs and explain their uses, their virtues, their drawbacks, and their limitations.  The detailer may well try to convince the doctor to prescribe the manufacturer's drugs for patients.  And if the detailer is successful, the doctor will make a 'nonbinding commitment' to write prescriptions using one or more of those drugs where appropriate.  If followed, that 'nonbinding commitment' is, at most, a nonbinding promise to consider advising a patient to use a drug where medical indications so indicate (if the doctor encounters such a patient), and to write a prescription that will likely (but may not) lead that person to order that drug under its brand name from the pharmacy.  . . . Where in this process does the detailer sell the product?  At most he obtains from the doctor a 'nonbinding commitment' to advise his patient to take the drug (or perhaps a generic equivalent) as well as to write any necessary prescription.  . . . [O]ther than in colloquial speech, to obtain a commitment to advise a client to buy a product is not to obtain a commitment to sell that product, no matter how often the client takes the advice (or the patient does what the doctor recommends)," Justice Breyer wrote. 

Justices Ruth Bader Ginsburg, Sonia Sotomayor and Elena Kagan joined in the dissent.  

Counsel 

Thomas C. Goldstein of Goldstein & Russell in Washington and Michael R. Pruitt of Jackson White in Mesa, Ariz., represent Christopher and Buchanan.  Paul D. Clement of Bancroft in Washington and Neal D. Mollen of Paul Hastings in Washington represent SmithKline. 

Cory L. Andrews of Washington Legal Foundation in Washington filed an amicus brief on behalf of the Washington Legal Foundation, the Allied Education Foundation and the CATO Institute.  Jeffrey S. Bucholtz of King & Spalding in Washington filed an amicus brief on behalf of Pharmaceutical Research and Manufacturers of America.  Aashish Y. Desai of Desai Law Firm in Irvine, Calif., filed an amicus brief on behalf of a certified class of pharmaceutical representatives from Johnson & Johnson.  Michael R. DiChiara of DiChiara Law Firm in Park Ridge, N.J., filed an amicus brief on behalf of pharmaceutical representatives.  John C. Eastman of the Center for Constitutional Jurisprudence in Orange, Calif., filed an amicus brief on behalf of the Center for Constitutional Jurisprudence. 

Kevin M. Kraham of Littler Mendelson in Washington filed an amicus brief on behalf of National Federation of Independent Business Small Business Legal Center.  Matthew W. Lampe of Jones Day in New York filed an amicus brief on behalf of Chamber of Commerce of the United States of America.  Paul W. Mollica of Outten & Golden in New York filed an amicus brief on behalf of National Employment Lawyers Association and National Employment Law Project.  Sarah M. Shalf of Emory Law School Supreme Court Advocacy Project in Atlanta filed an amicus brief on behalf of medical professionals.  Rae T. Vann of Norris, Tysse, Lampley & Lakis in Washington filed an amicus brief on behalf of Equal Employment Advisory Council. 

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