Supreme Court Showdown: Big Pharma Firms vs. Sales Reps

They’re a familiar sight at doctors’ offices, impeccably dressed and toting leather briefcases bursting with drug samples. Big Pharma employs about 90,000 of them across the country. In the recent Hollywood romantic comedy Love & Other Drugs, actor Jake Gyllenhaal portrayed one.

Pharmaceutical sales representatives are taking center stage at the U.S Supreme Court in a case that could not only determine whether they are eligible for millions of dollars in unpaid overtime but also could affect the livelihood of other workers who “promote” products.

Since 2006, drug sales reps have filed at least 20 class-action lawsuits challenging the pharmaceutical industry’s long-standing practice of denying them overtime benefits. The companies argue that two exceptions to the overtime provisions of the Fair Labor Standards Act apply to the pharma reps—the “outside sales” exception and the “administrative employee” exception.

Trial and appellate courts have come to differing conclusions on the pharma reps’ claims. In June 2010, a Chicago judge found that Abbott Laboratories reps were entitled to overtime, in part because “they do not ‘make sales’ ” as required by the outside sales exception. U.S. District Judge Ruben Castillo cited the U.S. Labor Department’s interpretation of its regulations implementing the FLSA.

But in another case against Abbott, a Philadelphia judge refused to “defer” to the Labor Department and ruled Nov. 14 that sales rep Gerald Ibanez was an exempt administrative employee because he “regularly exercised discretion and independent judgment in all aspects of his job.”

The Supreme Court jumped into the fray Nov. 28 by agreeing to review a case in which the San Francisco-based 9th U.S. Circuit Court of Appeals said that GlaxoSmithKline reps “make sales.” The issues before the Supreme Court—which will hear the case in 2012—is the scope of the outside sales exception and deference to the Labor Department’s interpretation.

Pharmaceutical reps “educate physicians and promote their employer’s drugs, with the actual sales occurring between the pharmaceutical company and the wholesaler,” says Michael Pruitt of Mesa, Arizona, the lead attorney for the GlaxoSmithKline plaintiffs. The 9th Circuit’s decision, he argues, “erases the traditional bright line” between salespeople and promoters and “could resonate” for other “promoters who merely pave the way for others’ sales,” including college recruiters and charitable solicitors.

Michael DiChiara, a Park Ridge, New Jersey, lawyer who represents Ibanez and other Abbott reps, says that if the Supreme Court reverses the 9th Circuit, “It would be very difficult for pharmaceutical companies to defend these [overtime] cases.”

The FLSA’s “white collar” overtime exemption applies to “any employee employed in a bona fide executive, administrative or professional capacity … or in the capacity of outside salesman.” The Labor Department’s implementing regulations define an “outside salesman” as any employee whose “primary duty” is “making sales.”

“[T]he DOL has declined repeatedly over several decades to apply the exemption to promoters who do not make their own sales,” Pruitt wrote in the Supreme Court petition on behalf of the Glaxo reps.

The class-action suits have followed the Labor Department’s adoption of a supplemental rule in 2004 in which it emphasized that an employer cannot meet the requirements of the outside sales exception “unless it demonstrates objectively that the employee, in some sense, has made sales.”

The GlaxoSmithKline lawsuit was filed in 2008. But a trial judge summarily dismissed the case, finding the reps were not entitled to overtime pay, and the 9th Circuit affirmed in November 2010. “[T]he ‘sale’ is the exchange of nonbinding commitments between the pharmaceutical sales reps and physician at the end of a successful [sales] call,” the court said. “Through such commitments, the manufacturer will provide an effective product, and the doctor will appropriately prescribe; for all practical purposes, this is a sale.”

The 9th Circuit disagreed with the New York-based 2nd Circuit, which, in February 2010, allowed a similar overtime case against Novartis Pharmaceuticals to proceed.

Pruitt sees the GlaxoSmithKline case as having implications beyond the pharmaceutical industry. The Labor Department and courts, he noted in his Supreme Court petition, have traditionally excluded from the outside sales exception “a variety of promoters who merely pave the way for others’ sales, including college recruiters, charitable solicitors, private army recruiters and student salesmen whose efforts lead to sales by others. Like these promoters, pharmaceutical sales reps cannot be directly credited with any sale.”

The Glaxo case does not directly involve the administrative employee exception that was addressed in the Philadelphia case against Abbott. But DiChiara says that if the Supreme Court finds that courts should defer to the Labor Department, drug companies will also not be able to argue that the administrative exception applies to their reps.

The Labor Department has stated that Novartis’ reps do not perform duties that meet the “exercise of discretion and independent judgment” test of the exception. “They don’t develop strategies,” DiChiara insists. “They get their marching orders and follow them.”

Matthew Heller is a freelance writer and editor based in Los Angeles. To comment, email editors@workforce.com.