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Supreme Court Finds Pharmaceutical Sales Representatives Exempt From Overtime Requirements of the FLSA

Yesterday, in Christopher v. Smithkline Beecham Corp., — U.S. —, 2012 WL 2196779 (2012), the Supreme Court of the United States held that pharmaceutical sales representatives qualify as “outside salesmen” and are therefore exempt from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”).  In addition to being welcome news for pharmaceutical companies, this case may be a harbinger of less judicial deference to regulatory agencies under certain circumstances.

In Christopher, the plaintiffs were employed as pharmaceutical sales representatives for roughly four years.  Their job was to convince doctors to prescribe drugs from GlaxoSmithKline. The plaintiffs visited doctors’ offices and provided information about the company’s products. The plaintiffs’ aimed to get nonbinding commitments from physicians to prescribe GlaxoSmithKline’s products in appropriate cases.  Each plaintiff spent about 40 hours per week promoting products to physicians and then spent an additional 10 to 20 hours a week attending events, reviewing product information, returning phone calls, and responding to e-mails.  It was undisputed that their employer did not pay the plaintiffs an overtime premium when they worked in excess of 40 hours per week.

Plaintiffs filed suit and argued that their employer violated the FLSA by failing to pay for overtime hours worked and, as a result, owed backpay and liquidated damages.  The employer filed a motion for summary judgment, arguing that pharmaceutical sales representatives are exempt from the FLSA’s overtime requirements as outside salesmen.  The trial court agreed and granted the employer’s motion for summary judgment.  The plaintiffs then filed a motion to alter or amend the judgment, arguing that the trial court failed to afford deference to the U.S. Department of Labor’s (DOL) interpretation of regulations defining the outside salesman exemption.  Interestingly, the DOL’s interpretation that pharmaceutical sales representatives did not qualify for the outside salesman exemption had been announced in an “uninvited” amicus brief the DOL filed in a similar case before the Second Circuit Court of Appeals in 2010.  The trial court rejected the argument and maintained that the plaintiffs were exempt as outside salesmen.  The Court of Appeals for the Ninth Circuit affirmed the decision.

In a 5 to 4 decision, the Supreme Court agreed and held that the pharmaceutical sales representatives qualified as outside salesmen “under the most reasonable interpretation of the DOL’s regulations.”  The majority opinion, written by Justice Alito, was highly critical of the DOL.  From the start, the Court seemed particularly bothered by the DOL’s sudden announcement that pharmaceutical sales representatives were non-exempt employees and wavering rationales through the course of litigation.  As the Court stated, “Despite the industry’s decades-long practice of classifying pharmaceutical [sales representatives] as exempt employees, the DOL never initiated any enforcement actions with respect to [the sales representatives] or otherwise suggested that it thought the industry was acting unlawfully.”  The Court also summarized the importance of clear guidance from administrative agencies:

It is one thing to expect regulated parties to conform their conduct to an agency’s interpretation once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretation in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference.

Accordingly, because of the DOL’s sudden announcement with respect to pharmaceutical sales representatives, the court went on to hold that the degree of deference to the DOL’s interpretation would only be proportional to “the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.” 

The Court was not persuaded by the DOL’s interpretation of the outside salesman exemption.  Specifically, the Court rejected the DOL’s interpretation that “a sale demands a transfer of title,” finding that it lacked the “hallmarks of thorough consideration.”  In particular, the Court held that the DOL’s position was inconsistent with the statutory definition of “sale” and Congress’ intent to define the term broadly, to account for the context of a given industry.  Given the FLSA’s broad definition, the Court reasoned that the pharmaceutical sales representatives’ objective of obtaining nonbinding commitments from physicians to prescribe their employer’s products falls “comfortably” within Congress’ broad definition of “sale.”  Moreover, the Court found that pharmaceutical sales representatives “bear all the external indicia of salesmen,” and the nature of their work and relatively high levels of compensation supported application of the outside salesman exemption.       

The decision in Christopher is a welcome outcome for the entire pharmaceutical industry. Christopher is also a significant decision on the larger question of how much courts must defer to administrative agency interpretations, especially where the agency has left a particular issue untouched but later announces a contrary interpretation during the course of litigation.  Indeed, even the four dissenting justices concluded that an “independent examination” of the outside salesman exemption was necessary given the DOL’s wavering interpretation.  In these instances, courts will not simply defer to or adopt an administrative agency’s interpretation of statutory provisions or regulations.  As a result, it may be wise for employers to refrain from instantly acquiescing to the positions taken by administrative agencies and, instead, seek legal counsel.

**  Eric Kelly extends his thanks to summer associate, Brian Peterson, for his assistance in drafting this summary.