Tuesday, June 19, 2012

SCOTUS: Pharmaceutical Reps Exempt from FLSA

ScotusThe Supreme Court issued its opinion in Christopher v. SmithKline Beecham yesterday, holding that pharmaceutical representatives are exempt from the Fair Labor Standards Act's overtime provisions as outside salespeople. Justice Alito wrote the opinion of the majority (Roberts, Kennedy, Scalia, and Thomas joined). Here is the syllabus (warning, it's long):

The Fair Labor Standards Act (FLSA) requires employers to pay employees overtime wages, see 29 U. S. C. §207(a), but this requirement does not apply with respect to workers employed “in the capacity of outside salesman,” §213(a)(1). Congress did not elaborate on the meaning of “outside salesman,” but it delegated authority to the Department of Labor (DOL) to issue regulations to define the term. Three of the DOL’s regulations are relevant to this case.  First, 29 CFR §541.500 defines “outside salesman” to mean “any employee . . . [w]hose primary duty is . . . making sales within the meaning of [29 U. S. C. §203(k)].”  §§541.500(a)(1)–(2).  Section 203(k), in turn, states that “ ‘[s]ale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for  sale, or other disposition.”   Second, §541.501 clarifies that “[s]ales within the meaning of [§203(k)] include the transfer of title to tangible property.”  §541.501(b). Third, §541.503 provides that promotion work that is “performed incidental to and in conjunction with an employee’s own outside sales or solicitations is exempt work,” whereas promotion work that is “incidental to sales made, or to be made, by someone else is not.”  §541.503(a). The DOL provided additional guidance in connection with its promulgation of these regulations, stressing that an employee is an “outside salesman” when the employee “in some sense, has made sales.” 69 Fed. Reg. 22162.

The prescription drug industry is subject to extensive federal regulation, including the requirement  that prescription drugs be dispensed only upon a physician’s prescription.  In light of this requirement, pharmaceutical companies have long focused their direct marketing efforts on physicians.  Pharmaceutical companies promote their products to physicians through a process called “detailing,” whereby employees known as “detailers” or “pharmaceutical sales representatives” try to persuade physicians to write prescriptions for the products in appropriate cases. 

Petitioners were employed by respondent as pharmaceutical sales representatives for roughly four years, and during that time their primary objective was to obtain a nonbinding commitment from physicians to prescribe respondent’s products in appropriate cases.  Each week, petitioners spent about 40 hours in the field calling on physicians during normal business hours and an additional 10 to 20 hours attending events and performing other miscellaneous tasks.  Petitioners were not required to punch a clock or report their hours, and they were subject to only minimal supervision.  Petitioners were well compensated for their efforts, and their gross pay included both a base salary and incentive pay.  The amount of incentive pay was determined based on the performance of petitioners’ assigned portfolio of drugs in their assigned sales territories.  It is undisputed that petitioners were not paid time-and-a-half wages when they worked more than 40 hours per week. 

Petitioners filed suit, alleging that respondent violated the FLSA by failing to compensate them for overtime.  Respondent moved for summary judgment, arguing that petitioners were “employed in the capacity of outside salesman,” §213(a)(1), and therefore were exempt from the FLSA’s overtime compensation requirement.  The District Court agreed and granted summary judgment to respondent.  Petitioners filed a motion to alter or amend the judgment, contending that the District Court had erred in failing to accord controlling deference to the DOL’s interpretation of the pertinent regulations, which the DOL had announced in an amicus brief filed in a similar action. The District Court rejected this  argument and denied the motion The Ninth Circuit, agreeing that the DOL’s interpretation was not entitled to controlling deference, affirmed.

Held: Petitioners qualify as outside salesmen under the most reasonable interpretation of the DOL’s regulations.  Pp. 8–25.

(a) The DOL filed  amicus  briefs in the Second Circuit and the Ninth Circuit in which it took the view that “a ‘sale’ for the purposes of the outside sales exemption requires a consummated transaction directly involving the employee for whom the exemption is sought.” Brief for Secretary of Labor as Amicus Curiae in In re Novartis Wage and Hour Litigation, No. 09–0437 (CA2), p. 11.  The DOL changed course after the Court granted certiorari in this case, however, and now maintains that “[a]n employee does not make a ‘sale’  . . . unless he actually transfers title to the property at issue.”  Brief for United States as Amicus Curiae 12–13. The DOL’s current interpretation of its regulations is not entitled to deference under Auer v. Robbins, 519 U. S. 452.  Although Auer ordinarily calls for deference to an agency’s interpretation of its own ambiguous regulation, even when that interpretation is advanced in a legal brief, see,  id., at 461–462, this general rule does not apply in all cases.  Deference is inappropriate, for example, when the agency’s interpretation is “ ‘plainly erroneous or inconsistent with the regulation,’ ”  id., at 461, or when there is reason to suspect that the interpretation “does not reflect the agency’s fair and considered judgment on the matter,” id., at 462.  There are strong reasons for withholding Auer deference in this case.  Petitioners invoke the DOL’s interpretation to impose potentially massive liability on respondent for conduct that occurred well before the interpretation was announced.  To defer to the DOL’s interpretation would result in precisely the kind of “unfair surprise” against which this Court has long warned.  See,  e.g.,  Long Island Care at Home, Ltd. v. Coke, 551 U. S. 158, 170–171. Until 2009, the pharmaceutical industry had little reason to suspect that its longstanding practice of treating detailers as exempt  outside salesmen transgressed the FLSA. The statute and regulations do not provide clear notice. Even more important, despite the industry’s decades-long practice, the DOL never initiated any enforcement actions with respect to detailers or otherwise suggested that it thought the industry was acting unlawfully. The only plausible explanation for the DOL’s inaction is acquiescence.  Whatever the general merits of  Auer  deference, it is unwarranted here.  The DOL’s interpretation should instead be given a measure of deference proportional to its power to persuade.  See United States v. Mead Corp., 533 U. S. 218, 228.  Pp. 8–14.

(b) The DOL’s current interpretation—that a sale demands a transfer of title—is quite unpersuasive.  It plainly lacks the hallmarks of thorough consideration.  Because the DOL first announced its view that pharmaceutical sales representatives are not outside salesmen in a series of amicus briefs, there was no opportunity for public comment, and the interpretation that initially emerged from the DOL’s internal decisionmaking process proved to be untenable.  The interpretation is also flatly inconsistent with the FLSA.  The statute defines “sale” to mean, inter alia, a “consignment for sale,” and a “consignment for sale” does not involve the transfer of title.  The DOL relies heavily on 29 CFR §541.501, which provides that “[s]ales . . . include the transfer of title to tangible property,” §541.501(b), but it is apparent that this regulation does not mean that a sale must include a transfer of title, only that transactions involving a transfer of title are included within the term “sale.”  The DOL’s “explanation that obtaining a non-binding commitment to prescribe a drug constitutes promotion, and not sales,” Reply Brief for Petitioners 17, is alsounconvincing.  Since promotion work that is performed incidental to an employee’s own sales is exempt, the DOL’s conclusion that detailers perform only nonexempt promotion work is only as strong as the reasoning underlying its conclusion that those employees do not make sales.  Pp. 14–16.  

(c) Because the DOL’s interpretation is neither entitled to  Auer deference nor persuasive in its own  right, traditional tools of interpretation must be employed to determine whether petitioners are exempt outside salesmen. Pp. 16–24.

(1) The FLSA does not furnish a  clear answer to this question, but it provides at least one interpretive clue by exempting anyone “employed . . . in the capacity of [an] outside salesman.”  29 U. S. C. §213(a)(1).  The statute’s emphasis on “capacity” counsels in favor of a functional, rather than a formal, inquiry, one that views an employee’s responsibilities in the context of the particular industry in which the employee works. The DOL’s regulations provide additional guidance.  Section 541.500 defines an outside salesman as an employee whose primary duty is “making sales” and adopts the statutory definition of “sale.”  This statutory definition contains at least three important textual clues.  First, the definition is introduced with the verb “includes,” which indicates that the examples enumerated in the text are illustrative, not exhaustive.  See  Burgess  v.  United States, 553 U. S. 124, 131, n. 3.  Second, the list of transactions included in the statutory definition is modified by “any,” which, in the context of §203(k), is best read to mean “ ‘one or some indiscriminately of whatever kind,’ ”  United States  v.  Gonzales, 520 U. S. 1, 5. Third, the definition includes the broad catchall phrase “other disposition.”  Under the rule of  ejusdem generis, the catchall phrase is most reasonably interpreted as including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.  Nothing in the remaining regulations requires a narrower construction.  Pp. 16–20.

(2) Given this interpretation of “other disposition,” it follows that petitioners made sales under the FLSA and thus are exempt outside salesmen within the meaning of the DOL’s regulations.  Petitioners obtain nonbinding commitments from physicians to prescribe respondent’s  drugs.    This  kind  of  arrangement, in the unique regulatory environment within which pharmaceutical companies operate, comfortably falls within the catchall category of “other disposition.” That petitioners bear all of the external indicia of salesmen provides further support for this conclusion.  And this holding also comports with the apparent purpose of the FLSA’s exemption.  The exemption is premised on the belief that exempt employees normally earn salaries well above the minimum wage and perform a kind of work that is difficult to standardize to a particular time frame and that cannot easily be spread to other workers. Petitioners—each of whom earned an average of more than $70,000 per year and spent 10 to 20 hours outside normal business hours each week performing work related to his assigned portfolio of drugs in his assigned sales territory—are hardly the kind of employees that the FLSA was intended to protect. Pp. 20–22.

(3) Petitioners’ remaining  arguments are also unavailing. Pp. 22–24.

Justice Breyer dissented (joined by Justices Ginsburg, Sotomayor, and Kagan). He agreed that the Solicitor General's recent change in position was not entitled to any particular difference, but he would have analyzed the relevant regulations differently. The operative language in his reading required that the employee’s “primary duty” be “making sales within the meaning of section 3(k) of the Act.” That section of the Act provides that “‘Sale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for  sale, shipment for sale, or other disposition.” 29 U. S. C. §203(k). Because the reps don't get any kind of contract or commitment from doctors to prescribe the drugs, Justice Breyer would have found them not to be outside salespeople. There's a bit more there, too, but I'll let you read it. 

In my opinion, the dissent has the stronger reasoning and more classical plain meaning analysis. And I'm a little troubled that inaction alone could estop an agency from enforcing its statute or regulations when agencies have to make choices about where to spend limited resources--and especially where those agencies might depend on private complaints to initiate enforcement. At the same time, I'm sympathetic to the notice issues if this really is a change in interpretation, i.e. there had been an official statement that this was outside selling, and now the agency changed its mind. But that doesn't seem the case.



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There are two especially troubling aspects of this case. First, is that the pharmaceutical industry essentially mounted a "too big to regulate" defense. The industry knowingly operated in a gray area, and when it was called to account, it argued that the court should not impose liability because it would cost the industry billions to pay back wages to 90,000 workers.

The other troubling aspect is the Court's focus on the wages earned by the workers, rather than the amount of hours required to obtain those wages. The court refers to the plaintiffs earning an average of $72,000 to $76,000 per year. But, to earn those wages, they were required to work 50 to 60 hours per week. If they had been paid time-and-a-half for hours beyond 40, then their hourly wages would only be $20 to $26 an hour -- not exactly lofty sums. Also, more than a quarter of their earnings came in the form of nonguaranteed incentive pay, making for a rather precarious existence.

Posted by: Andrew Strom | Jun 19, 2012 7:33:16 AM

Good points, Andrew. Do you think the majority had in the back of their minds the class notions that the exemptions seem to make? By that, I mean that it seems like the FLSA exempts many professions on the higher end of the earning scale. My understanding was that one reason for that was the notion that those people of a higher socioeconomic class would have more power to bargain to protect themselves and more power to exit if they didn't like their working conditions.

It's possible, too, that the Justices are so focused on the high cost of health care that they don't want to add more cost to prescriptions by finding liability. That goes to your too big to sue point.

Posted by: Marcia | Jun 20, 2012 4:54:33 AM

I think there are two things going on here. First, is the absolute inability of the justices to adopt the perspective of workers. This was evident in Long Island Care at Home v. Coke, a case involving home care workers where Justice Breyer went on at length in oral argument about how coverage under the FLSA would affect families trying to make arrangements to care for elderly parents. There was never any comparable concern expressed about how home care workers manage to care for their own families while working 60 hours per week at low wages. Similarly here, the entire focus of the justices is on the effect of the ruling on the employer; at oral argument there was this repeated notion that a ruling in favor the workers would somehow be unfair to the employer.

Second, I think you are absolutely right about the class notions clouding the judgment of the justices. The justices may be willing to concede that the protections afforded by the FLSA make sense for low-wage, low-skilled workers, but they seem to believe that workers with more education and/or those who earn higher wages don't need that protection.

One potentially unintended consequence of the decision is that it invites the DOL to take much more initiative when it comes to enforcing the law, a result that I'm sure will not sit well with the business community or Republicans in Congress. The DOL should now go out and aggressively police every industry to make sure there are no widespread violations; otherwise, we can expect more employers to claim that the DOL acquiesced to their practices. Of course, it is doubtful that Congress will provide the necessary funding for this approach.

Posted by: Andrew Strom | Jun 20, 2012 7:53:24 AM

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