Pharmaceutical sales representatives (“PSRs”) are exempt as outside sales employees — at least according to the Ninth Circuit, which issued its decision February 14 in Christopher v. SmithKline Beecham. This decision departs from a recent Second Circuit holding in In re Novartis Wage & Hour Litigation, which reached the opposite conclusion.
Pharmaceutical Sales Representatives and the Challenge to GlaxoSmithKline’s Practices
GlaxoSmithKline (“Glaxo”), like other pharmaceutical companies, markets products to distributors or retail pharmacies who then sell them to patients. The PSR’s job is to “sell” to physicians — that is, to encourage physicians to prescribe a company’s products. Glaxo provides PSRs with detailed reports about physicians within their assigned territories and trains PSRs to obtain strong commitments from physicians. In addition to a base salary, Glaxo pays its PSRs incentive-based compensation based on product sales and revenue performance.
In Christopher v. SmithKline, two PSRs brought a class action alleging that Glaxo misclassified them as exempt employees, claiming they were in fact entitled to overtime and other compensation due to non-exempt employees under the FLSA. Glaxo argued that as “outside salesmen,” PSRs were exempt from overtime pay requirements. The PSRs noted that according to supplemental rules promulgated by the Department of Labor (“DOL”) in 2004, a “salesman” is one who either makes sales within the meaning of Section 3(k) of the Fair Labor Standards Act (“FLSA”), or who obtains orders or contracts. As these PSRs do neither, they argued they are not exempt outside salespersons.
After the district court granted Glaxo’s motion for summary judgment, plaintiffs appealed.
Ninth Circuit Disagrees with the Second Circuit’s Deference to the DOL’s Amicus Brief
In In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d Cir. 2010), the Second Circuit held that PSRs did not meet the outside sales exemption. That circuit agreed with the amicus brief filed by the DOL, urging that when an employee promotes a pharmaceutical to a physician, the employee “does not in any sense make the sale.” The Second Circuit found that deference to the DOL’s interpretation was warranted because the interpretation clarified the FLSA’s language and was not plainly erroneous or inconsistent with the regulation.
Rejecting this rationale, the Ninth Circuit found, among other things, that the DOL’s position was both plainly erroneous and inconsistent with the regulation for reasons underlying the nature of pharmaceutical sales. In the pharmaceutical industry, the relevant purchasers are the prescribing physicians and not the patients, as the latter cannot personally choose their prescriptions. The court recognized the legal barriers present in the industry, given federal restrictions on the exchange of products between a PSR and physician. Finally, the court considered the Pharmaceutical Research and Manufacturers of America Code, which regulates the marketing of medicine to healthcare professionals in the way a consumer products-maker might limit express warranties by its sales force. The court concluded that in the pharmaceutical world, the relevant “sale” is the exchange of non-binding commitments following a call.
The Ninth Circuit was not subtle in questioning the DOL’s credibility, taking pains to point to “decades of DOL nonfeasance and the consistent message to employers that a salesman is someone who ‘in some sense’ sells.” Characterizing the PSR’s primary duty as causing physicians to commit to prescriptions, which it found evident in the shaping of sales activities based on personalized physician reviews, the court upheld the exempt status of the PSRs and denied their claim for overtime pay.
We will have to await final word from the United States Supreme Court, where this issue may be headed in view of the split among circuits.
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This article was originally published by Bingham McCutchen LLP.