TBA Law Blog

Posted by: Christy Gibson on Jul 6, 2012

By Kathleen Pohlid*

In a 5 to 4 vote, the Supreme Court, in Christopher v. SmithKline Beecham Corporation, 567 U.S.  --- (June 18, 2012), effectively resolved a dispute involving the healthcare industry for which there have been split decisions among federal circuits.  I’m not referring to the Affordable Care Act, but to the issue as to whether pharmaceutical sales representatives (or pharma sales reps) qualify for the outside sales representative exemption under the Fair Labor Standards Act. 

Justice Alito, writing for the majority, concluded the pharmaceutical sales representatives qualify as “outside salesmen” within the meaning of § 213(a)(1) of the FLSA and the Department of Labor (DOL) regulations, 29 C.F.R. § 541.500 et seq.  This decision upheld both the District Court for the District of Arizona decision, and the Ninth Circuit Court of Appeals decision. The majority rejected DOL’s arguments, submitted in its amicus briefs, that the exemption requires “a consummated transaction directly involving the employee for whom the exemption is sought.”  The Court’s decision also effectively overrules In re Novartis Wage and Hour Litigation, 611 F. 3d 141 (2nd Cir. 2010), holding that the exemption did not apply.  

The core of the dispute centered on the fact that pharmaceutical sales representatives (or detailers) are prohibited under federal law from dispensing prescription drugs.  In 1951, Congress amended the Food, Drug, and Cosmetic Act, requiring prescription drugs to be dispensed only upon a physician prescription.  In the decades following that amendment, the pharmaceutical industry has employed detailers to contact physicians, provide them with product information, and seek their nonbinding commitment to prescribe their drugs to patients. 

In order to qualify for the outside sales exemption under the FLSA, the employee’s primary duty must either be in making “sales,” or obtaining orders or contracts for services, or for the use of facilities for which consideration will be paid by the client or customer.  Additionally, the employee must be “customarily and regularly engaged away from the employer’s place or places of business.”  Because petitioners did not consummate any sales, they, along with the DOL, contended they did not fall within the exemption and therefore, were entitled to overtime pay.

Section 203(k) of the FLSA defines “sale” to “include any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition.” Since the FLSA and DOL regulations define “sale” to include consignment, which does not involve any transfer of title, the Court held such a requirement could not be imposed as a necessary condition for the exemption to apply.  The Court also reasoned that Congress specifically included “other disposition” within the definition in order to define “sale in a broad manner” as an “attempt to accommodate industry-by-industry variations in selling commodities,” which would include the pharmaceutical industry.     

The Court also found a lack of “fair notice” with DOL’s interpretation and its lack of prior enforcement with respect to this exemption within the pharmaceutical industry to be suspect.  It noted petitioners – Michael Christopher and Frank Buchanan – were well paid, earning over $72,000 and $76,000, respectively, during their employment from 2003 to 2007.  Since the nationwide gross pay median for pharmaceutical sales representatives exceeds $90,000, the financial stakes of potential overtime were significant for this industry.  The Court expressed its reluctance to “impose potentially massive liability” based upon DOL regulations which it found to be “ambiguous.”

Justice Alito also emphasized that until 2009 when DOL submitted its interpretation in amicus briefs, “the pharmaceutical industry had little reason to suspect that its longstanding practice of treating detailers as exempt transgressed the FLSA.”  Furthermore, since DOL had never “initiated any enforcement actions with respect to detailers or otherwise suggested it thought the industry was acting unlawfully,” the majority concluded, “the more plausible hypothesis is that [DOL] did not think the industry’s practice was unlawful.”

In his dissent, Justice Beyer also declined to give the DOL interpretation “any especially favorable weight,” and focused on the regulations to conclude, “a detailer’s primary duty is not that of ‘making sales’ or the equivalent.”

Although this decision is significant for its resolution of the exemption for pharmaceutical sales representatives, its reasoning and arguments may be useful for counsel to consider in FLSA matters involving employees in other industries who engage in consignment sales or “other distribution” sales of products. 


*Kathleen Pohlid is an attorney practicing with DHPM, PC – Law Firm in Nashville.She provides legal counsel and litigation services in employment, governmental compliance, Americans with Disabilities Act (discrimination and accommodation) and Occupational Safety and Health to a variety of businesses in the construction, health care, transportation, and service industries.  Mrs. Pohlid can be reached at kpohlid@dhpmlaw.com or 615.425.3702.