Yesterday, in a packed courtroom, the United States Supreme Court heard oral argument in Christopher v. SmithKline Beecham Corp., No. 11-204 (on appeal from the Ninth Circuit) to determine whether the pharmaceutical industry has been properly classifying its sales representatives as “exempt” from overtime for the past 75 years under the Fair Labor Standards Act’s outside sales exemption. In addition, the Court considered what deference, if any, to give to the Department of Labor’s interpretation of the outside sales exemption regulations, and its position, explained for the first time in an amicus brief filed in a similar action before the Second Circuit, that sales reps do not “make sales” within the meaning of the statute because they do not transfer title or physically sell pharmaceutical products to the ultimate end users.
The case is significant for at least four reasons:
- First, it represents the first time – at least in recent memory – that the Supreme Court will address the applicability of one of the “white collar” exemptions to the FLSA (i.e., the administrative, executive, professional and outside sales exemptions).
- Second, the decision will have far-reaching implications for the pharmaceutical industry, which by most estimates, employs approximately 90,000 sales reps, the vast majority of whom are and have been classified as exempt from overtime for many decades.
- Third, the decision could have implications beyond the pharmaceutical industry to other industries that employ so-called “sales representatives” that do not physically sell products but otherwise engage in something akin to “sales” within the meaning of that particular industry – in this case, by obtaining non-binding commitments from health professionals to prescribe where medically appropriate.
- Fourth, the decision could strike a blow against the Department of Labor’s (and other federal agencies’) attempts to define and/or apply its own regulations for the first time in an amicus brief, after years of inactivity and/or acquiescence, rather than via formal rulemaking, including notice and comment periods.
In what was a veritable who’s who of the legal world, Thomas Goldstein – author and founder of SCOTUSblog – represented the Petitioners/sales reps; Deputy Solicitor General Malcolm Stewart represented the United States as amicus curiae; and Paul Clement (former Solicitor General) represented the Respondent/GlaxoSmithKline.
Over the course of one hour of oral argument, the Court peppered counsel with questions and commentary. Some of the interesting takeaways from the argument were:
- While the Court appeared divided at times, it did not appear to be divided entirely along ideological lines, which could result in an interesting plurality or majority and/or a unanimous decision decided on narrow grounds.
- Justices Kagan, Ginsburg, and Sotomayor appeared the most receptive to holding that sales reps do not fall within the outside sales exemption because they do not “make sales.” They seemed concerned that expanding the outside sales exemption to include everybody who “in some sense” makes sales would ultimately swallow the exemption and let in everybody who does promotional work (i.e., “pitchmen”) as opposed to only those who consummate transactions.
- Justice Roberts also noted, at one point, that while Respondent was correct that sales reps undergo sales training, are assigned sales territories, and are compensated like salespeople, they “don’t do sales.” (Justice Scalia, on the other hand, left little doubt that in his view, the plaintiffs “look like salesmen to me.”)
- The Court grappled with the DOL’s and Petitioner’s definition (and limitation) of what it means to be a “sale” – i.e., whether a sale must include the transfer of title or an agreement to transfer title, or can be more amorphous depending on the practical realities and peculiarities of the particular industry, as Respondent urged. No clear consensus appears likely.
- The Court did not seem to have a firm grasp of the practicalities of what it means to be “exempt” or “non-exempt” from overtime (i.e., what kinds of employees are typically exempt or non-exempt, and how that works in the real world). This is not particularly surprising given the factual nature of such an inquiry, and the fact that the specific applicability of particular white collar exemptions has not previously been decided by the Court.
- While the Court did not seriously question the DOL’s authority to interpret its own regulations or issue guidance or rules (including a bright line rule differentiating “promotion” and “sales” work), the largest concern was that (i) the DOL’s latest position had been developed by lawyers – not the Secretary of Labor – as part of a concerted effort to effectuate policy through amicus briefs as opposed to formal rulemaking; and (ii) the DOL had seemingly sat on its hands and allowed the pharmaceutical industry to classify sales reps as exempt for 75 years without doing anything about it (either through enforcement actions, opinion letters, or rulemaking).
- As Justice Breyer noted, “If the agency is going to …suddenly do something it hasn’t done for 75 years, the right way to do it is to have notice and comment, hearings, allow people to present their point of view, and then make some rules or determine what should happen. Perhaps they’d say for the future let’s do this, but not let’s give people a windfall for the past…that’s my instinctive reaction.”
- Justice Kennedy agreed, and stated that “instead of doing a regulation, amended regulation . . . you’re filing amicus briefs quietly in different – different courts. It seems to me that’s not nearly as fair or straightforward or as candid as – as an agency out to be.”
- Justice Scalia expressed similar dissatisfaction with the DOL’s process, noting that “instead of doing rulemaking, instead of doing adjudication, we’re going to file amicus briefs, and the court will accept our view in that amicus brief, and hey, presto, we have made law…That’s extraordinary.”
A ruling by the Supreme Court is expected by the end of June 2012. While the nature of the questions posed at oral argument can often be a red herring, one possible scenario is that the Supreme Court will find a way to affirm the Ninth Circuit’s decision on narrow grounds, while leaving the door open for the Department of Labor to attempt to implement new, narrower, regulations of what it means to be an outside salesperson (limiting its application only to those who transfer title in a good or enter into agreements to transfer title), but only via the formal rulemaking process, which will allow for notice and comment periods.
We will provide further updates as soon as an opinion is issued.
* Disclaimer – This firm previously represented Bristol-Myers Squibb in a similar action brought by former pharmaceutical sales representatives seeking overtime under the FLSA. In Amendola v. Bristol-Myers Squibb, the Court denied “conditional certification” of a nationwide class of sales reps, based primarily on the Court’s conclusion that no reasonable jury was likely to find that sales reps were misclassified as exempt under the administrative exemption. This blog post is purely the opinion and analysis of Proskauer, and does not in any way represent the views or opinions of, or contain any input from, Bristol-Myers Squibb or anyone else.