Supreme Court declines opportunity to resolve Circuit split regarding FLSA exemptions
On February 28, the United States Supreme Court denied certiorari in the Novartis Pharmaceuticals Corp. v. Lopes et al case. As a result, employers and courts must continue to operate without guidance from the high court with respect to whether pharmaceutical sales representatives (and potentially field sales personnel in other industries) satisfy the “duties test” requirements of two Fair Labor Standards Act (“FLSA”) white collar exemptions—the outside sales exemption and the administrative exemption. The Supreme Court’s decision to deny certiorari is particularly troubling in light of the fact that other Circuit Courts of Appeal have issued decisions on this issue which conflict with the Novartis decision.
In Novartis, 611 F.3d 141 (2d Cir. 2010), the Second Circuit ruled that pharmaceutical sales representatives working for Novartis Pharmaceuticals Corporation do not meet the criteria for either the FLSA’s outside sales exemption or its administrative exemption. As such, these employees are entitled to overtime pay for work in excess of 40 hours per workweek.
Specifically, the Second Circuit held that pharmaceutical sales representatives do not qualify for the outside sales exemption because they do not “sell” anything within the meaning of the FLSA and its interpreting regulations. Instead, the court found that pharmaceutical sales representatives merely promote the use of their employer’s products, and noted that it is unlawful for such employees to sell prescription drugs or enter into contracts with healthcare providers requiring the providers to prescribe such drugs. The Second Circuit also held that the sales representatives are not allowed to exercise sufficient discretion or independent judgment in the performance of their primary duties to satisfy the administrative exemption. In so ruling, the Second Circuit both granted considerable deference to the DOL, which filed an amicus brief in the matter, and broke away from long-standing interpretations of the exemption. The court did not address the administration-production dichotomy analysis under the administrative exemption, and therefore left open the issue of whether the employees could satisfy the requirement of performing work which is directly related to the management or general business operations of the employer (assuming certain sales employees could satisfy the discretion and independent judgment element). One critical question in the administrative exemption analysis is the degree of discretion and independent judgment an employee must exercise in order to qualify for the administrative exemption. Deferring to the DOL’s position, the court ruled that where an employee’s duties merely “involve” the exercise of discretion, they are not exempt under the administrative exemption. Instead, according to the Second Circuit and the DOL, a higher degree of discretion must be shown.
This decision appears to conflict with the Third Circuit’s decision in Smith v. Johnson & Johnson, 593 F.3d 280 (3d Cir. 2010), which held that the administrative exemption did apply to pharmaceutical sales representatives working for Johnson & Johnson. In reaching this conclusion, the Third Circuit pointed to the fact that the sales representatives executed nearly all of their duties with some discretion and independent judgment.
The split of authority regarding application of the outside sales exemption to pharmaceutical sales representatives will likewise persist. By definition, the outside sales exemption applies to any employee “whose primary duty is making sales.” Outside the Second Circuit, this exemption has been interpreted broadly to include anyone who “sells” in some sense of the word. For example, in Christopher v. SmithKline, No. 10-15257, 2011 U.S. App. LEXIS 2834 (9th Cir. Feb. 14, 2011), the Ninth Circuit recently held that, for purposes of the outside sales exemption, the term “sale” must be interpreted broadly to include employees who “in some sense” sell. Based on this broad interpretation, the Ninth Circuit held that pharmaceutical sales representatives qualified for the exemption. The narrow interpretation of the outside sales exemption in Novartis directly conflicts with this decision, as well as decisions in other circuits.
The Supreme Court’s decision not to review Novartis also perpetuates the uncertainty regarding the degree of deference that should be afforded to amicus briefs submitted by the DOL or other administrative agencies. In Novartis, the Second Circuit held that the DOL’s interpretation of its own regulations deserved controlling deference. However, courts in other parts of the country have ruled otherwise. If the Supreme Court had granted certiorari in Novartis, then employers would possibly have had some authoritative guidance as to the extent to which administrative agencies are entitled to deference from the courts. Instead, the circuit courts will be left to decide this issue on their own.
Unless and until the Supreme Court addresses the exempt status of pharmaceutical sales representatives, employers in the pharmaceutical, biotechnology, and medical device industries (and potentially all industries with sales representatives) will be forced to deal with the current (often conflicting) patchwork of decisions from various courts when determining the exempt status of such positions in their organizations.