Supreme Court Rejects Agency Interpretation; Pharmaceutical Reps Exempt From Overtime

by Pillsbury Winthrop Shaw Pittman LLP

[author: Michael J. Kass]

In Christopher et al. v. Smithkline Beecham Corp.,--- S.Ct. ----, 2012 WL 2196779, U.S., June 18, 2012 (NO. 11-20412, C.D.O.S, 6646, the Supreme Court rejected the Department of Labor's interpretation of its own regulations and instead concluded that pharmaceutical "detailers" are "outside salesmen" who are exempt from the Fair Labor Standards Act's ("FLSA") overtime wage requirements.

Noting that the DOL had previously advanced an inconsistent interpretation of its regulations in amicus briefs filed with the Second and Ninth Circuits, the Court first concluded that the DOL's revised interpretation of its regulations after certiorari was granted was not entitled to deference under Auer v. Robbins, 519 U.S. 452. The Court then rejected the DOL's present interpretation that a sale required a transfer of title because it was inconsistent with the FLSA definition of sale. Applying a functional analysis to the role of detailers in the idiosyncratic and highly regulated pharmaceutical industry, the Court concluded that they made sales for purposes of that industry and were otherwise analogous to more traditional outside salesmen for purposes of the FSLA's exemption.

Pharmaceutical detailers are responsible for promoting to physicians a portfolio of drugs within an assigned geographical territory. However, because physicians do not buy the drugs, and instead prescribe medication for their patients who ultimately purchase the drugs from a pharmacy, detailers can only obtain nonbinding commitments from physicians that they will prescribe the portfolio drugs in appropriate cases. Detailers spend approximately 40 hours per week calling on physicians and typically spend an additional 10-20 hours per week attending events and entertaining physicians. They are subject to minimal supervision and are not required to punch a clock or otherwise report their hours. Detailers are well compensated and receive substantial incentive pay based on how their drug portfolio performed in their assigned territory. This action was filed because they are not paid overtime.

In similar litigation before the Second Circuit, the DOL had previously argued 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." The District Court in Christopher rejected that interpretation and granted summary judgment to the employer on the grounds that detailers were employed in the capacity of outside salesmen and therefore were exempt employees under the FSLA. The Ninth Circuit split with the Second Circuit and, in affirming the District Court, also declined to defer to the DOL's interpretation. The Supreme Court granted certiorari to resolve the split.

At the Supreme Court, the DOL modified its interpretation and argued that "[a]n employee does not make a ‘sale' … unless he actually transfers title to the property at issue." Under Auer, an agency's interpretation of its own ambiguous regulation, even if advanced in a legal brief, is ordinarily entitled to deference. The Court declined to defer to the DOL's revised interpretation of its own regulation, noting that deference is not warranted when: (1) the agency's interpretation is inconsistent with the regulation; or (2) the interpretation "does not reflect the agency's fair and considered judgment" (e.g., when the interpretation conflicts with a prior interpretation).

The Court first observed that deferring to the DOL's interpretation would impose "massive liability" on employers without "fair warning" that the regulated conduct was prohibited. The Court reasoned that employers could reasonably have concluded prior to these lawsuits that a nonbinding commitment from a physician qualified as an "other disposition" in the DOL's definition of sale. Moreover, the Court was clearly concerned with the DOL's failure to ever object to the long-standing industry practice of treating detailers as exempt employees (noting that there are now approximately 90,000 such well-paid employees) and concluded that acquiescence was the only plausible explanation for the DOL's inaction.

In concluding that deference to the DOL's interpretation was not warranted in this case, the Court also shed some light on how Auer deference would be applied going forward. The Court generally acknowledged the advantage in deferring to an agency's interpretation of its own ambiguous regulation, provided regulated parties are given an opportunity to conform their behavior after the clarification is announced. But the Court did not believe regulated parties should be required to "divine" the agency's interpretation before that announcement, or be held liable when that announcement comes for the first time in an enforcement proceeding.

After rejecting the DOL's proposed definition of sale as requiring a transfer of title (noting that the FSLA definition included a “consignment for sale" which does not involve a change of title), the Court analyzed the FLSA and relevant regulations to conclude that the statute called for a functional rather than formal inquiry into whether detailers were "employed … in the capacity of [an] outside salesman." The Court was impressed with the FLSA's broad definition of "sale" and concluded that the "list of transactions that precedes the phrase 'other disposition' … represent[s] an attempt to accommodate industry-by-industry variations in methods of selling commodities." Turning to the pharmaceutical industry, the Court concluded that because obtaining non-binding commitments from physicians is the most a detailer can do to ensure the eventual disposition/sale of pharmaceuticals, such commitments qualify as "other disposition[s]" under the FLSA definition of sale.

In support of this conclusion, the Court observed that detailers bear "all of the external indicia of salesmen" in terms of training, supervision and incentive-based compensation. Moreover, highly compensated detailers who worked flexible hours away from the office were not the kind of employees the FLSA was intended to protect.

Although Christopher's holding with respect to the exempt status of pharmaceutical detailers under the FLSA is not likely to be directly relevant beyond that idiosyncratic industry, the Court's willingness to apply a functional analysis to the statute (i.e., concluding that a non-binding commitment from a physician to prescribe a drug when appropriate is a "sale") may be significant with respect to how the FSLA's exemption for outside salesmen is applied in other industries. More important, though, is the apparent limit placed on Auer deference when an agency first clarifies a regulation in the course of a proceeding that would impose liability on a regulated party for conduct they could not reasonably have understood to have been prohibited prior to the clarification. To the extent an agency's clarifying interpretation is first provided in an enforcement proceeding, or apparently in a private lawsuit seeking damages, the Court's early description of Auer as calling for deference "even when [the] interpretation is advanced in a legal brief" would now seem to be limited by Christopher.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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