Ninth Circuit Rules Pharmaceutical Sales Reps Are Exempt Under FLSA

Finds Workers “Primary Duty” Is To Increase Company Sales

A federal appellate court recently held that pharmaceutical sales representatives (PSRs) qualify as exempt outside sales representatives who are not entitled to overtime pay under the Fair Labor Standards Act (FLSA). The Ninth Circuit Court of Appeals’ decision strongly rebukes the arguments advanced by the U.S. Secretary of Labor, who intervened in the case, and directly contradicts a ruling issued by the Second Circuit Court of Appeals. Christopher v. SmithKline Beecham Corp., DBA GlaxoSmithKline, No. 10-15257, Ninth Circuit Court of Appeals (February 14, 2011).

Factual Background

Glaxo employs outside salespeople to market drugs to physicians. Due to regulations governing the distribution of pharmaceutical drugs, consumers cannot purchase them from a pharmacy without first obtaining a prescription from a licensed physician. Drug companies, such as Glaxo, sell their products to distributors or retail pharmacies who cannot, in turn, sell them to the end user unless the consumer first obtains a physician’s authorization.

In the context of what the court called “this restrictive sales environment,” PSRs call on doctors and encourage them to prescribe Glaxo’s drugs. They provide information and product samples, build relationships with doctors and convince them to use Glaxo’s drugs over those offered by competitors.

Glaxo recruits applicants who have prior sales experience and trains them on its “Assertive Selling Always Pro-fessional (ASAP)” model. They also are trained to follow Glaxo’s “Winning Practices” program. ASAP and Winning Practices are similarly structured and emphasize that PSRs should: (1) analyze and understand what is happening in an assigned region; (2) work with the team to drive results; (3) master professional knowledge to understand clinical management of patients; (4) prepare for calls; (5) “Sell Through Customer-Focused Dialogue”; (6) obtain the strongest commitment possible from a health care professional at the end of the call; and (7) provide added value to the customer relationship.

PSRs usually work outside the office and spend much of their time traveling to the offices of physicians within their assigned territory. They are paid a salary, as well as a bonus that is tied to sales volume within the territory.

Legal Analysis

At issue in this case was whether the work of the PSRs amounts to a “sale” or “sell” that is exempt under 29 U.S.C. section 203(k) of the FLSA, or whether PSRs merely engage in “promotional work that is incidental to sales made” and therefore are nonexempt under regulations promulgated by the Department of Labor (DOL). The plaintiffs and the Secretary of Labor argued that PSRs do not engage in selling as contemplated by the FLSA, but rather engage only in promotional work that is “incidental” to sales made by others. To support this position, the Secretary pointed to 29 C.F.R. 541.500(a)(1), which provides that sales within the meaning of section 3(k) “include transfer of title to tan-gible property, and in certain cases, of tangible and valuable evidence of intangible property.” Because the “selling” done by PSRs does not include transfer of property, the Secretary argued that they were not engaged in selling under the FLSA.

This, of course, is not the end of the story because by use of the term “include,” this provision contemplates that other activities will constitute sales. The Secretary also pointed to the language of section 3(k) which states that “`[s]ale’ or `sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.”

The Ninth Circuit gave no deference to the Secretary’s interpretation of the law. In dismissing the argument, the court noted that the Secretary had argued by “statutory renvoi – that is, a `sale’ means a `sale’” and that the Secretary’s argument did not take into consideration that the statute clearly refers to “other disposition.” The court focused on the activities performed by PSRs and concluded that they were engaged in sales, albeit to the doctors who prescribe the drugs rather than to either the distributors and retail pharmacies who buy them from Glaxo or the end users who ultimately purchase and consume Glaxo’s products. In so holding, the court rejected the Secretary’s view that a sale “means unequivocally the final execution of a legally binding contract for the exchange of a discrete good,” and noted that its holding was buttressed by the “Secretary’s acquiescence in the sales practices of the drug industry for over seventy years.”

Practical Impact

According an of counsel in Ogletree Deakins’ San Francisco office: “The Ninth Circuit ruling in Christopher that PSRs qualify for the outside sales exemption under the FLSA is in direct conflict with the finding of the Second Circuit in Novartis Pharmaceuticals Corp. and also Kuzinski v. Schering Corp. Adding to the mix is the Third Circuit, which has found PSRs to be administratively exempt in Smith v. Johnson & Johnson and Baum v. AstraZeneca. Given the importance to the pharmaceutical industry (which employs more than 90,000 PSRs) and the split be-tween the Second, Third and Ninth Circuits on this issue, we anticipate that the last word on this subject will be rendered by the U.S. Supreme Court, despite its recent decision to not accept the Novartis case for review. In the meantime, employers in the Ninth Circuit may avail themselves of the helpful analysis in Christopher.”