Federal courts rule against overtime in pharmaceutical cases

In a pair of decisions, the U.S. Supreme Court and the 7th Circuit Court of Appeals examined different exemption provisions to overtime requirements of the Fair Labor Standards Act but reached the same conclusion: Pharmaceutical sales representatives are not entitled to overtime pay.

The Supreme Court considered the outside salesman exemption in Christopher, et al. v. SmithKline Beecham Corp., 11-204, while the 7th Circuit reviewed the administrative exemption in Susan Schaefer-LaRose v. Eli Lilly & Co., 10-3855. Both courts sided with the employers, finding that although pharmaceutical “detailers,” as they are called in the drug-making industry, worked under heavy regulations and constraints, they did meet the overtime exemption requirements outlined in the FLSA.

Guevara

Attorneys familiar with the two rulings point to broader implications that the cases hold, which could guide future decisions on wage-and-hour lawsuits as well as the behaviors of federal agencies.

In addition, the decisions come at a time when lawsuits filed under the FLSA are increasing. These types of cases have been growing: 1,961 cases were filed in the reporting year that ended March 2001, according to a report in Law360. The total hit 7,006 new cases filed during the reporting year that concluded March 2011 and rose again to 7,064 in the reporting year that finished March 31, 2012.

Eli Lilly & Co.

The 7th Circuit combined the Eli Lilly case with two others involving Illinois-based Abbott Laboratories. In these cases, the plaintiffs claimed they were misclassified as exempt and were due overtime pay. The defendants argued the employees were not entitled to overtime under both the administrative exemption and the outside sales exemption.

Since the Supreme Court was already looking at the outside sales provision, the 7th Circuit concentrated on the administrative exemption. Under this section of the FLSA, the administrative exemption applies to employees who do office or non-manual work directly related to the management or general operations of the company and who exercise discretion and independent judgment in matters of significance.

Ellen Boshkoff, partner at Faegre Baker Daniels LLP, was the lead counsel for Lilly. James O’Brien III, counsel at Seeger Weiss, was the lead counsel for Susan Schaefer-LaRose.

The plaintiff in the case had worked for Lilly from 1988 to 2006 and was frustrated by the long hours that often necessitated working on weekends and holidays, O’Brien said. She had to travel a great deal and was required to be in the field calling on physicians from 8 a.m. to 5 p.m. which meant she had to use her evening hours to complete the paperwork.

Seeger Weiss sent letters to 777 former and current sales representatives at Lilly, and 388 joined the Schaefer-LaRose case.

These plaintiffs maintained they did not meet the standard for exercising discretion and independent judgment because they had to perform their jobs according to precise regulations set forth by the U.S. Food and Drug Administration and by their employer.

In its opinion, the 7th Circuit reserved the District Court’s ruling in Abbott and upheld the ruling of the Southern District of Indiana in the Lilly case. The 7th Circuit found that although the sales personnel must deliver the pharmaceutical companies’ messages with precision, they are not “simple mouthpieces, reciting scripts.” They are given extensive education and training, work under minimal supervision, and must tailor their messages to respond to the circumstances.

The 7th Circuit’s ruling marks the ninth consecutive decision, stretching over 63 years, in which the court found the employee at issue was not entitled to overtime under the administrative exemption, according to O’Brien. Not since its 1949 opinion in McComb v. Robert W. Hunt Co., 172 F.2d 751 (7th Cir. 1949), has the court held that an employee did not perform administratively exempt work, he said.

Boshkoff believes the ruling from the 7th Circuit, as well as from the Supreme Court, will provide guidance not just in cases involving pharmaceutical sales representatives but for anyone seeking clarification of the administrative exemption. It is an important case, she said, that people will use when applying the administrative exemption to employees in such positions as human resources, marketing, accounting and procurement.

SmithKline Beecham Corp.

Focusing on the outside sales exemption, the Supreme Court rejected the plaintiffs’ argument that their job duties do not meet the standard of selling. Pharmaceuticals detailers are barred from directly selling drugs by federal law, so they solicit nonbinding commitments from physicians to prescribe the product.

Boshkoff

The court held that what the detailers were doing did meet FLSA’s broad definition of “outside salesman” which allows a “nonbinding commitment” to qualify as a sale. They were functioning as sales representatives, even though they were not actually selling pharmaceuticals, in part because they received a commission based on the number of prescriptions written.

A key element to the ruling is the Supreme Court’s decision not to give deference to the U.S. Department of Labor’s interpretation of the outside salesman exemption. The court faulted the agency for changing its reasoning over what constitutes a sale in the briefs it filed with the lower courts and held the interpretation “lacks the hallmarks of thorough consideration.” In addition, it noted that the department first announced its position in a series of amicus briefs which did not provide the opportunity for public comment.

Greg Guevara, partner in the labor and employment group at Bose McKinney & Evans LLP, sees this decision as reminding the labor department to make regulations through the established due process instead of in the courts.

“The broader implications are that the Supreme Court essentially said to the Department of Labor that if they want to take a position regarding the Fair Labor Standards Act, they need to do this through the formalized rulemaking process rather than through litigation,” Guevara said. “I think the potential ramification is if there is going to be a change in the way that the white collar exemptions are interpreted, it is more likely the Department of Labor is going to pursue the change through the rulemaking process.”

The federal agency filed briefs on behalf of the plaintiffs in the cases, but the 7th Circuit did not consider the department’s amicus brief because it determined the regulations regarding the administrative exemption were unambiguous.

On the other hand, the Supreme Court noted that while deference is usually given to an agency’s interpretation of its own “ambiguous regulation,” giving deference in the SmithKline Beecham case to the department’s interpretation of the outside sales exemption would bring an “‘unfair surprise’ against which this Court has long warned.”

The court highlighted that the pharmaceutical industry has treated its detailers as exempt outside salesmen for decades and the Department of Labor never brought any enforcement action. In turn, the “only plausible explanation” for the department’s inaction is that it accepted the practice. •