Thursday, February 17, 2011

9th Circuit Holds Pharmaceutical Salespersons Qualify As Exempt Employees Under The FLSA Outside Salesperson Exemption

In Christopher v. SmithKline Beecham Corporation, an overtime case brought by pharmaceutical sales representatives (“PSR’s”), the United States Court of Appeals for the Ninth Circuit affirmed the District Court’s summary judgment for the employer, holding the plaintiffs were outside salespersons and therefore exempt from the overtime pay requirements of the Fair Labor Standards Act ("FLSA"). 
SmithKline Beecham Corporation (“Glaxo”) hired plaintiffs in 2003 to meet with physicians and encourage them to prescribe Glaxo pharmaceuticals.  Plaintiffs spent most of their time traveling to the offices of physicians within their assigned territories.  Plaintiffs claimed they worked between 10 and 20 hours each week outside of normal business hours, for which they received no overtime wages.  Plaintiffs did not sell the drugs or negotiate prices or contracts with physicians, rather, they attempted to, and did obtain commitments from physicians to use Glaxo products when appropriate.  Plaintiffs received a salary and incentive-based compensation, which was paid if market share, sales volume, revenue, or dose volume increased in their sales territory.
Plaintiffs, and the Secretary of the Department of Labor ("DOL") appearing as amicus curiae (friends of the court) in a similar case in the United States Court of Appeals for the Second Circuit, In re Novartis Wage & Hour Litig., 611 F.3d 141 (2d Cir. 2010), claimed that the PSR’s did not meet the FLSA Outside Sales Exemption for overtime because  they did not “make sales” as defined by the Department of Labor regulations 29 C.F.R. §541.501(b).  The Novartis court held: “Where the employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it, we conclude that it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.”  Id. at 154. 
However, the Ninth Circuit court rejected the reasoning of the Secretary and the Novartis court on the grounds the Secretary of Labor's interpretation of the FLSA was merely a restatement of the statutory language, and the Secretary of Labor's position was inconsistent with the DOL’s own regulations and prior practices.  Since 1940, the Secretary has defined the phrase “other disposition” in the statute’s definition of “sale” as a broad catch-all category, and has allowed PSR’s to fall under the outside salesmen exemption.  Because salespersons in the pharmaceutical industry are not selling to patients (who cannot legally choose which drug to use and therefore cannot be characterized as buyers) and are instead obtaining commitment from physicians to prescribe Glaxo's products, the PSR's are in effect making sales.  Further, even though the commitments to prescribe pharmaceuticals is not binding on the physicians, the pharmaceutical manufacturers value these commitments enough to reward pay to PSRs sales commissions based on those non-binding commitments.  Finally, the Court applied the paradigm outside salesperson case Jewel Tea Co. v. Williams 118 F.2d 202 (10th Cir. 1941), which justified the application of the outside sales exemption to the Glaxo PSR's because the activities of the PSR’s were substantially the same as the outside salespersons in Jewel Tea.  . . . 

While this case establishes that PSR's qualify for the outside sales exemption under Federal law, under California State law, it is not quite as clear whether the PSR's qualify for the outside salespersons exemption under Labor Code section 1171 Industrial Welfare Commission wage orders.  While federal law focuses on whether the employee's primary function is making sales, California law focuses exclusively on whether the individual works more than half the working time selling or obtaining orders or contracts.  The language of the wage orders define an Outside Salesperson as "any person . . . who customarily and regularly works more than half the working time away from the employer's place of business selling tangible . . . items or obtaining orders or contracts for products . . ."  The PSR's in this case clearly spent more than half their working time obtaining commitments from physicians, but it is unclear whether California would interpret the language of the Wage Orders broadly enough to allow the PSR's to be considered outside salespersons given that PSRs typically do not make actual sales.  Furthermore, now that the Ninth Circuit's ruling conflicts with the Second Circuit's holding in Novartis, it is possible that the United States Supreme Court will address this issue.