By Thomas Kaufman (follow me on Twitter)
On June 18, 2012, the U.S. Supreme Court issued a 5-4 decision Christopher v. SmithKline Beecham, holding that pharmaceutical sales representatives ("pharma reps") generally meet the FLSA’s outside sales exemption. While there are differences between California and the FLSA concerning the elements of the outside sales exemption, this case dealt with the definition of "selling" under the exemption, which is an area where the two statutes have generally been interpreted as parallel. Accordingly, if Christopher is adopted in California, then pharma reps will qualify as outside salespersons under California law as well. The case is helpful to employers both with respect to the outside sales exemption and with efforts to combat the Obama Administration Department of Labor ("DOL") when it intervenes in wage and hour cases on behalf of the employees.
For those who do not know what pharma reps are, they are the people who travel around, chatting up doctors about various drugs the doctors should prescribe their patients for specific conditions. There was a B-movie called "Love and Other Drugs" a few years ago that featured Jake Gyllenhaal as a pharma rep who specialized in persuading doctors to prescribe Viagra. Anyway, pharma reps look like outside salespersons in most respects in that they are outside nearly 100% of the time, they are trained in sales, and they are compensated with incentive pay based on how well "their drug" is selling in their assigned territory. The hitch is that, by law, they cannot actually obtain a binding commitment from a doctor to prescribe the drug to a patient (or the patient to fill a prescription) but only can obtain a non-binding agreement that the doctor will prescribe the drug in appropriate cases. For this service, pharmaceutical companies pay them an average of more than $70,000 per year (the median compensation is actually above $90K).
The plaintiffs argued that the work pharma reps do is really just non-exempt "promotion" work rather than the necessary "sales" work to trigger the exemption. The Second and Ninth Circuits split on this question, with the Ninth Circuit (surprisingly) finding that these employees qualified as outside salespersons because they "sell" as that notion is understood in the pharmaceutical industry. Notably, the Ninth Circuit had rejected the interpretation of the statute the Department of Labor advanced in amicus briefs it filed in both the appellate cases. The Supreme Court granted cert, and affirmed that decision.
The Supreme Court’s actual analysis of the FLSA is mildly interesting for wage and hour practitioners, but it is a bit narrow in its application. The Court noted a few features of the statute and actual governing regulations.
(1) The Court noted that the exemption applies to employees who work "in the capacity" of outside salespersons, which the Court interpreted as calling for a " functional, rather than a formal, inquiry" and "one that views an employee’s responsibilities in the context of the particular industry in which the employee works."
(2) The definition of outside salesperson (29 C.F.R. § 541.500(a)) is an employee whose primary duty is making "any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition." Both the terms "any sale" and "other disposition" are broad terms that suggest that the exemption was meant to include "transactions that might not be considered sales in a technical sense, including exchanges and consignments for sale."
(3) Another regulation (29 CFR §541.501(b)) provides that sales "include" transfer of title of property, which the Court interpreted as indicating that transfer of title was simply one way a sale could occur as opposed to the exclusive way. This is bolstered by the fact that consignments do not involve transfer of title and are expressly listed as a kind of sale.
From these premises, the Court concluded that pharma reps qualified as outside sales representatives, because they sold to the extent the law allows selling at all in the industry. This is helpful in outside salesperson cases (and pharma cases) but is a holding of somewhat narrow application outside of industries with unusual governing practices for "sales."
What is of broader application is how the U.S. Supreme Court completely rejected the Obama administration’s effort to put their thumb on the scale for the plaintiffs by intervening with amicus briefs in these cases that appeared to contradict the DOL’s enforcement position for the preceding 70 years. Indeed, the Court noted that, although the pharma industry has operated in the same manner for decades, the DOL never gave any indication that it believed these positions were misclassified as exempt, creating a widespread reliance. Indeed, potential liability in these cases probably went to the nine or ten figure range.
Furthermore, from its initial intervention as an amicus in the Second Circuit Novartis case to its intervention in the Supreme Court in this case, the DOL revised its position on what a "sale" meant. As the Supreme Court noted, the DOL originally took the position in the Novartis case that a sale required a "consummated transaction." When that position received criticism in the Ninth Circuit for its vagueness, the DOL revised its position to argue in the Supreme Court that a sale requires "the transfer of title to property." The Court noted that, in addition to morphing over the course of just two years, the new position was actually inconsistent with the plain text of the regulations which include "consignment" as an example of a "sale." As mentioned above, consignments do not involve the transfer of title.
The Supreme Court determined that the DOL’s interpretation was entitled to no deference and was not persuasive either. In my words, not theirs, the Court was saying that where it looks like the DOL changes positions just for political purposes and does so in a way that bypasses the ordinary comment procedure of actual regulations, their interpretation is not entitled to any deference. Or, as the Supreme Court put it:
"It is one thing to expect regulated parties to conform their conduct to an agency’s interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency’s interpretations 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, whatever the general merits of Auer deference, it is unwarranted here. We instead accord the Department’s interpretation a measure of deference 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."
This aspect of the decision appears to be applicable in the mortgage industry, where the DOL issued an administrator’s decision in March 2010 that reversed its previous opinion letters on the application of the administrative exemption to mortgage loan originators. Unsurprisingly, this set off another wave of exemption suits. While there was not a 70-year track record of deeming mortgage loan officers to be exempt, the DOL made an abrupt shift in position that adopted new standards that the DOL had never adopted before. This decision should provide employers ammunition to challenge any new ruling from the DOL that changes the agency’s position without going through the ordinary rulemaking process.