U.S. Supreme Court To Decide Whether FLSA Outside Salesperson Exemption Applies To Pharmaceutical Sales Representatives

On April 16, 2012, the Supreme Court of the United States conducted oral argument in Christoper v. Smithkline Beecham Corp., and will decide whether the federal Fair Labor Standards Act exemption for outside salespersons applies to pharmaceutical sales representatives ("PSRs") such that PSRs are not required to be paid in addition to their substantial salaries and incentive compensation based on sales productivity overtime pay for hours worked in excess of 40 hours in a workweek.

Both the trial court and the Ninth Circuit Court of Appeals in a published decision agreed the FLSA outside salespersons exemption applies to PSRs. The trial court ruled PSRs "unmistakably fit within the terms of the exemption," and noted PSRs "are not hourly workers, but instead earn salaries well above minimum wage—up to $100,000 a year" and receive bonuses in lieu of overtime pay. The trial court, addressing the fact that PSRs cannot lawfully under federal law actually sell prescription medications to anyone, explained: "A PSRs ultimate goal is to close an encounter with a physician by obtaining a non-binding commitment from the physician to prescribe the PSR's assigned product. In this highly regulated industry, that is the most a PSR can achieve." On appeal, based on its analysis of the FLSA, implementing regulations adopted by the Department of Labor, and applicable precedent, the Ninth Circuit Court of Appeals affirmed the trial court's decision to grant summary judgment in favor of Smithkline Beecham and held the FLSA outside salespersons exemption applies to PSRs.  In so holding, the Ninth Circuit Court of Appeal rejected the plaintiffs' argument "that by not transferring any product to physicians, they are not selling pharmaceuticals, but only 'promoting' them." The court explained: "Plaintiffs' contention that they do not 'sell' to doctors ignores the structure and realities of the heavily regulated pharmaceutical industry. It is undisputed that federal law prohibits pharmaceutical manufacturers from directly selling prescription medications to patients." The court went on to explain: "Unlike conventional retail sales, the patient is not at liberty to choose personally which prescription pharmaceutical he desires. As such, he cannot be fairly characterized as the 'buyer.' Instead, it is patient's physician, who is vested with both a moral and legal duty to prescribe medication appropriately, who selects the medication and is the appropriate focus of our 'sell/buy' inquiry."

The Ninth Circuit Court of Appeal's decision in this case is in conflict with a contrary decision of the Second Circuit Court of Appeals in In re Novartis Wage And Hour Litigation (2d Cir. 2010) 611 F.3d 141 holding the FLSA outside salespersons exemption does not apply to PSRs, which we suspect is one of the reasons the US Supreme Court granted the plaintiff's petition for certiorari of the Ninth Circuit Court of Appeal's decision in this case.

In any event, we think the plaintiff's theory of liability based on their contention they do not engage in sales because they—as a matter of federal law—cannot actually transfer prescription medications to anyone is based on a rigid and hypertechnical reading of the pertinent regulations that is an example of the sort of "gotcha" wage and hour litigation plaguing employers not just in California but nationwide.

The Supreme Court's decision in this case is expected in June, and we will report on that decision when it is issued. Please stay tuned.

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