Supreme Court Clarifies Meaning of 'Sale' Under the Fair Labor Standards Act

Background

Two sales representatives, Michael Christopher and Frank Buchanan, brought suit against their former employer, SmithKline Beecham. Already highly compensated individuals (the Court noted the median pay for pharmaceutical dealers nationwide exceeds $90,000 per year), Christopher and Buchanan sought unpaid overtime pay for the hours they worked beyond the company's 8:30 a.m. to 5:00 p.m. business hours, during which they visited physician offices. Christopher and Buchanan worked an additional 10 to 20 hours per week, attending events, responding to e-mails and phone calls, and reviewing product information. They were not required to punch a time card, and their salaries included incentive pay for the volume of pharmaceutical sales in their assigned territories, reflecting the number of prescriptions physicians had written for the drugs the men marketed.

After they filed suit, the district court granted summary judgment in favor of SmithKline Beecham on the basis of the outside salesman exception, and the Ninth Circuit affirmed.

The Decision

In reaching its decision, the 5-4 Court, split along ideological lines, focused on the meaning of “sales” under the FLSA. The DOL took the position in its amicus brief that “an employee does not make a 'sale' for the purposes of the 'outside salesman' exception unless he actually transfers title to the property at issue.”

The Court was unanimous in one respect: Both the majority and the dissent agreed that the DOL's interpretation that drug reps were not exempt was owed no deference, as it failed to provide “fair warning” to the industry. The DOL's position was not announced until a 2009 amicus brief filed in the Second Circuit, eliminating the “opportunity for notice and comment.” Furthermore, the DOL had not taken any enforcement actions in the many years the industry had classified drug reps as exempt.

While drug reps do not sell anything in the traditional manner of direct title transfer, they “obtain nonbinding commitments from physicians to prescribe their employer's prescription drugs in appropriate cases.” Justice Alito, writing for the majority, reasoned this was enough to qualify as a sale under the FLSA, bringing the drug reps under the “outside salesm[e]n” exemption. By obtaining this nonbinding commitment, the drug reps did the most they could, given the highly regulated nature of the pharmaceutical industry, to “ensure the eventual disposition of the products” their employer sells, which must be recognized as a sale. Additionally, the Court held that the drug reps “bear all of the external indicia of salesmen” and were “hired for their sales experience.” The Court majority reasoned that their interpretation of the FLSA was consistent with the purpose of the exemption, as these employees were well compensated, and required significant flexibility in the performance of their duties.

In contrast, Justice Breyer, writing for the dissent, disagreed, arguing that those “nonbinding commitments” did not amount to a sale, as it was the “pharmacist ' who will have sold the drug,” not the drug rep. Justice Breyer reasoned that a drug rep's duties were more properly understood as promotional, “designed to stimulate sales ' made by someone else” rather than the rep's own sales. Under applicable regulations, promotional work falls within the statutory exemption “only when the promotional work is actually performed incidental to an in conjunction with an employee's own outside sales or solicitations.” As a consequence, drug reps could not qualify under the “outside salesman” exemption.

Beyond Big Pharma?

Saving billions of dollars in potential overtime claims certainty brings a big sigh of relief to the pharmaceutical industry. According to briefs filed by the parties, the industry employs approximately 90,000 drug reps, all of whom have been classified as exempt. The Court's ruling has already had immediate impact, leading a judge in the U.S. District Court for the Eastern District of Tennessee to grant pharmaceutical company Covidien's motion for summary judgment in a proposed class action suit brought by drug reps alleging unpaid overtime.

Looking beyond pharmaceuticals, the Court's expansion of the outside sales exemption certainly impacts other sales-driven industries where employees are involved in less traditional sales, especially when a third party or intermediary is involved in the transaction. As in Christopher, employees engaged in activities that appear to be more promotional or advisory in nature, but still have a sales component, will likely be covered by the exemption. For example, in recent years the Southern District of New York has twice ruled that insurance sales employees who also dispensed financial advice were covered under the outside sales exemption, a position that should be followed by other courts under Christopher's guidance. See Gold v. New York Life Insurance Co., 2011 U.S. Dist. LEXIS 62095 (S.D.N.Y. May 19, 2011); Chenensky v. New York Life Insurance Co., 2009 U.S. Dist. LEXIS 119549 (S.D.N.Y. Dec. 22, 2009).

More importantly, the Court appears to be embracing a more modern and expansive understanding of the FSLA's white-collar exemptions, looking to the purpose behind the Act, rather than adhering to the strict and formulaic approach advanced by the DOL. In particular, courts following Christopher may interpret the FLSA to widen the number of employees covered under other hotly contested exemptions, such as the administrative exemption. Overall, Christopher was a big win for all employers.

Finally, the Court delivered a blow to the DOL by unanimously rejecting the Department's interpretation of its own regulations, which the DOL advanced through amicus briefs. This sends a message to other government agencies to proceed with caution when using an amicus brief to make a change in regulation or statute interpretation, especially when the interpretation may result in significant liability for the regulated industry, or when the agency has failed to give the regulated industry adequate warning, such as through notice and comment rulemaking.

Gil A. Abramson is a partner in the Baltimore office of Jackson Lewis LLP. He is the Labor Practice Group Coordinator for that office. Katherine Levy is an associate in the same office.

The U.S. Supreme Court recently held, in Christopher v. SmithKline Beecham Corp. , 567 U.S. ___, No. 11-204, 2012 WL 2196779 (June 18, 2012), that pharmaceutical sales representatives, commonly known as “drug reps,” are qualified as “outside salesm[e]n” under the Fair Labor Standards Act (FLSA) and are, therefore, not subject to the minimum wage and overtime requirements of the Act. In doing so, the Court rejected the Department of Labor's (DOL) interpretation of the Act and relevant regulations, and resolved a split between the Ninth and Second circuits.

The FLSA exempts those “employed in the capacity of outside salesm[e]n.” In order to qualify under this exemption, an employee's primary duty must be “making sales,” defined as “any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” Under the DOL's interpretation, a “sale” required a transfer of title, an understanding the Court rejected, instead reading the “other disposition” language to permit a more
expansive meaning of the word.

The ruling provides a big win for pharmaceutical companies, which have been fighting class action suits across the nation filed by former pharmaceutical representatives seeking overtime pay. It also promises to impact other sales-driven industries. Additionally, the Court's rejection of the DOL's interpretation of its own regulations may signal an adjustment in the way government agencies can successfully use amicus briefs to announce a change in agency interpretation of relevant statutes and regulations.

Background

Two sales representatives, Michael Christopher and Frank Buchanan, brought suit against their former employer, SmithKline Beecham. Already highly compensated individuals (the Court noted the median pay for pharmaceutical dealers nationwide exceeds $90,000 per year), Christopher and Buchanan sought unpaid overtime pay for the hours they worked beyond the company's 8:30 a.m. to 5:00 p.m. business hours, during which they visited physician offices. Christopher and Buchanan worked an additional 10 to 20 hours per week, attending events, responding to e-mails and phone calls, and reviewing product information. They were not required to punch a time card, and their salaries included incentive pay for the volume of pharmaceutical sales in their assigned territories, reflecting the number of prescriptions physicians had written for the drugs the men marketed.

After they filed suit, the district court granted summary judgment in favor of SmithKline Beecham on the basis of the outside salesman exception, and the Ninth Circuit affirmed.

The Decision

In reaching its decision, the 5-4 Court, split along ideological lines, focused on the meaning of “sales” under the FLSA. The DOL took the position in its amicus brief that “an employee does not make a 'sale' for the purposes of the 'outside salesman' exception unless he actually transfers title to the property at issue.”

The Court was unanimous in one respect: Both the majority and the dissent agreed that the DOL's interpretation that drug reps were not exempt was owed no deference, as it failed to provide “fair warning” to the industry. The DOL's position was not announced until a 2009 amicus brief filed in the Second Circuit, eliminating the “opportunity for notice and comment.” Furthermore, the DOL had not taken any enforcement actions in the many years the industry had classified drug reps as exempt.

While drug reps do not sell anything in the traditional manner of direct title transfer, they “obtain nonbinding commitments from physicians to prescribe their employer's prescription drugs in appropriate cases.” Justice Alito, writing for the majority, reasoned this was enough to qualify as a sale under the FLSA, bringing the drug reps under the “outside salesm[e]n” exemption. By obtaining this nonbinding commitment, the drug reps did the most they could, given the highly regulated nature of the pharmaceutical industry, to “ensure the eventual disposition of the products” their employer sells, which must be recognized as a sale. Additionally, the Court held that the drug reps “bear all of the external indicia of salesmen” and were “hired for their sales experience.” The Court majority reasoned that their interpretation of the FLSA was consistent with the purpose of the exemption, as these employees were well compensated, and required significant flexibility in the performance of their duties.

In contrast, Justice Breyer, writing for the dissent, disagreed, arguing that those “nonbinding commitments” did not amount to a sale, as it was the “pharmacist ' who will have sold the drug,” not the drug rep. Justice Breyer reasoned that a drug rep's duties were more properly understood as promotional, “designed to stimulate sales ' made by someone else” rather than the rep's own sales. Under applicable regulations, promotional work falls within the statutory exemption “only when the promotional work is actually performed incidental to an in conjunction with an employee's own outside sales or solicitations.” As a consequence, drug reps could not qualify under the “outside salesman” exemption.

Beyond Big Pharma?

Saving billions of dollars in potential overtime claims certainty brings a big sigh of relief to the pharmaceutical industry. According to briefs filed by the parties, the industry employs approximately 90,000 drug reps, all of whom have been classified as exempt. The Court's ruling has already had immediate impact, leading a judge in the U.S. District Court for the Eastern District of Tennessee to grant pharmaceutical company Covidien's motion for summary judgment in a proposed class action suit brought by drug reps alleging unpaid overtime.

Looking beyond pharmaceuticals, the Court's expansion of the outside sales exemption certainly impacts other sales-driven industries where employees are involved in less traditional sales, especially when a third party or intermediary is involved in the transaction. As in Christopher, employees engaged in activities that appear to be more promotional or advisory in nature, but still have a sales component, will likely be covered by the exemption. For example, in recent years the Southern District of New York has twice ruled that insurance sales employees who also dispensed financial advice were covered under the outside sales exemption, a position that should be followed by other courts under Christopher's guidance. See Gold v. New York Life Insurance Co., 2011 U.S. Dist. LEXIS 62095 (S.D.N.Y. May 19, 2011); Chenensky v. New York Life Insurance Co., 2009 U.S. Dist. LEXIS 119549 (S.D.N.Y. Dec. 22, 2009).

More importantly, the Court appears to be embracing a more modern and expansive understanding of the FSLA's white-collar exemptions, looking to the purpose behind the Act, rather than adhering to the strict and formulaic approach advanced by the DOL. In particular, courts following Christopher may interpret the FLSA to widen the number of employees covered under other hotly contested exemptions, such as the administrative exemption. Overall, Christopher was a big win for all employers.

Finally, the Court delivered a blow to the DOL by unanimously rejecting the Department's interpretation of its own regulations, which the DOL advanced through amicus briefs. This sends a message to other government agencies to proceed with caution when using an amicus brief to make a change in regulation or statute interpretation, especially when the interpretation may result in significant liability for the regulated industry, or when the agency has failed to give the regulated industry adequate warning, such as through notice and comment rulemaking.

Gil A. Abramson is a partner in the Baltimore office of Jackson Lewis LLP. He is the Labor Practice Group Coordinator for that office. Katherine Levy is an associate in the same office.