On July 6, 2010, the United States Court of Appeals for the Second Circuit decided In re Novartis Wage & Hour Litigation, 611 F.3d 141 (2d. Cir. 2010), holding that Novartis pharmaceutical sales representatives are not exempt from the requirements of the Fair Labor Standards Act (FLSA).

This opinion marks the first significant circuit court decision addressing an issue that has produced conflicting results among federal courts. In holding that the Novartis pharmaceutical sales representatives are non-exempt employees, the Second Circuit found that they do not qualify for either the "outside sales" or the "administrative" exemptions.

The In re Novartis decision is of particular significance in the pharmaceutical industry, but the Second Circuit's reasoning may not extend beyond that industry because of the unique sales process that typically occurs with pharmaceuticals. That said, all medical technology employers should take heed of the In re Novartis decision and other recent, similar cases.

In re Novartis Wage & Hour Litigation

Approximately 2,500 pharmaceutical sales representatives sued Novartis, claiming they should not be treated as exempt employees under the FLSA and similar state statutes and should be paid overtime compensation. Novartis moved for summary judgment before the United States District Court for the Southern District of New York, asserting that plaintiffs were "outside salesm[e]n" and/or "administrative" employees, and thus exempt from the overtime provisions of the FLSA and related state laws. The district court granted summary judgment and plaintiffs appealed to the Second Circuit, which vacated the summary judgment and remanded the case.

The Novartis Sales Representatives Are Not Exempt as "Outside Salesmen."

The Second Circuit first rejected the argument that the Novartis sales representatives are "outside salesm[e]n" under the FLSA. In doing so, the court cited favorably to the amicus brief filed by the United States Department of Labor in support of the sales representatives, and gave "controlling" deference to the Department of Labor's interpretations of its own regulations that focus on the employee's "primary duty" and require that the employee "in some sense make the sales." Under the regulations, a person who merely promotes a product that will be sold by another rather than transferring title does not "make the sale."

Applying the regulations to the case, the court noted several salient facts about the work performed by the Novartis sales representatives: (1) they "promote" the pharmaceutical product to physicians, but can transfer nothing more than free samples because it is illegal to transfer ownership of any quantity of drugs in exchange for anything of value; (2) they cannot take an order for purchase; rather, Novartis sells its drugs to wholesalers who then sell the drugs to pharmacies who ultimately sell the drugs to patients with prescriptions from physicians; and (3) they cannot obtain from physicians a binding commitment to prescribe Novartis drugs.

Based on these facts, the court concluded "that the district court should have ruled that the Reps are not outside salesmen within the meaning of the FLSA and the regulations."

Novartis Sales Representatives Are Not Exempt as "Administrative" Employees.

The Second Circuit also found that the Novartis sales representatives are not exempt under the FLSA as administrative employees. The relevant issue here was whether the employees' primary duties include "the exercise of discretion and independent judgment with respect to matters of significance." Again, the court considered the facts of the case in light of its deference to the Department of Labor's amicus brief and its regulatory interpretations, concluding that the sales representatives exercised their skills within severe limits imposed by Novartis.

In contrast to Novartis' efforts to portray the sales representatives' jobs as squarely within the administrative exemption, including arguing that these employees were free to allocate their resources and to decide how best to persuade physicians to prescribe Novartis drugs, the court noted several limits placed upon the sales representatives. These limits included: (1) they have no role in planning marketing strategy; (2) they are required to visit physicians according to a frequency dictated by Novartis; (3) they must promote a given drug a certain number of times per trimester as established by Novartis; (4) they must hold at least the number of promotional events that Novartis requires; (5) they have no role in formulating the "core messages" delivered to physicians; (6) they may not deviate from the "core messages" developed by Novartis; and (7) they are forbidden from answering any question for which they have not been provided scripted answers.

Accordingly, the Second Circuit held that the Novartis sales representatives "are not bona fide administrative employees within the meaning of the FLSA and the regulations."

Related Cases

There have been several other recent federal court decisions that have addressed whether pharmaceutical sales representatives are exempt under the FLSA, with varying results.

Jirak v. Abbott Labs., Inc., No. 07-C-3626, 2010, U.S. Dist. LEXIS 58804 (N.D. Ill. June 10, 2010). Decided just prior to the In re Novartis case, this court found a class of Abbott pharmaceutical sales representatives to be non-exempt for nearly identical reasons relied upon by the In re Novartis court. Citing favorably to the Department of Labor's amicus brief in the In re Novartis case, the court also found "that the DOL's interpretation is both persuasive and consistent with our analysis of the regulations."

Smith v. Johnson & Johnson, 593 F.2d 280 (3d Cir. 2010). In Smith, the Third Circuit held that a Johnson & Johnson pharmaceutical sales representative was properly classified as an exempt "administrative" under the FLSA. Regarding the "exercise of discretion and independent judgment" test, the court emphasized that the plaintiff described herself as the manager of her own business, who could run her territory as she saw fit. That deposition testimony was determinative of the issue, and the court was unwilling to consider the plaintiff's subsequent argument that she overinflated her own importance. However, the court did note that the decision rested on specific facts developed in discovery, and recognized "that based on different facts, courts, including this Court, considering similar issues involving sales representatives for other pharmaceutical companies, or perhaps even for J&J, might reach a different result." Id. at 6 n.1.

Although the Third Circuit suggested that Smith might be limited by the plaintiff's own characterization of her duties, two subsequent decisions have also found the administrative exemption applies to pharmaceutical sales representatives. See Baum v. Astrazeneca LP, No. 09-2150, 2010 U.S. App. LEXIS 6047, *4-11 (3d Cir. Mar. 24, 2010) ("Baum's duties were very similar to the plaintiff's duties in Smith."); Jackson v. Alpharma, Inc., No. 07-3250, 2010 U.S. Dist. LEXIS 72435, *14 (D.N.J. July 19, 2010).

Several other district courts have concluded that pharmaceutical sales representatives have been properly classified as exempt under the "outside salesman" or "administrative" exemptions, or both. In reaching the conclusion that such employees are outside salesmen, these courts point to various factors, including the nature of the pharmaceutical industry, the spirit, purpose and goals of the FLSA, and a generally flexible interpretation of "making sales." One court summed up the rationale when it appealed to the "common sense to acknowledge that sometimes, society is better off when a duck, walking and talking so, can simply be treated as one." Baum v. Astrazeneca LP, 605 F. Supp. 2d 669, 687 (W.D. Pa. 2009), aff'd, 2010 U.S. App. LEXIS 6047; see also, e.g., Christopher v. SmithKlein Beecham Corp., No. CV-08-1498, 2009 U.S. Dist. LEXIS 108992 (D. Ariz. November 20, 2009) (citing cases).

What Is the Likely Impact of These Recent Decisions?

Despite, or perhaps because of, the recent decisions regarding pharmaceutical sales representatives, the proper FLSA classification of those employees and other pharmaceutical and medical technology employees is not settled. Accordingly, pharmaceutical and medical technology employers should bear several things in mind.

First, both the In re Novartis and Jirak cases are notable for their deference to the Department of Labor's interpretation of its regulations. If and when the department submits briefs in future cases, courts may be similarly deferential.

Second, the application of those cases finding pharmaceutical sales representatives to be non-exempt to other cases is likely limited by the particular factual circumstances surrounding pharmaceutical sales representatives. Although the In re Novartis court determined that the Novartis sales representatives do not "make sales," an analysis of non-pharmaceutical medical technology sales representatives could yield a different conclusion. For example, if a sales representative promotes a medical device directly to the physician, practice, or hospital that can then purchase the device, or secure a commitment to purchase the device, then there would be more facts to support an exempt classification then were present in the In re Novartis case. Similarly, to the extent that medical technology sales representatives, or even other pharmaceutical sales representatives, exercise greater discretion in the performance of their jobs than established by Novartis, a court may find the administrative exemption to apply.

What Should Pharmaceutical and Medical Technology Employers Do?

Going forward, pharmaceutical and medical technology employers should consider the following questions when determining whether a particular sales representative has been or is properly classified as an exempt or non-exempt employee:

Outside Salesman Exemption

• Is the employee's primary duty to actually make sales?
• Does the employee actually consummate a transaction (i.e., secure the execution of a contract for the purchase of goods), or merely promote a product in hopes of stimulating sales?

Administrative Exemption

• Do the employee's primary duties include the exercise of discretion and independent judgment with respect to matters of significance?
• Does the employee manage his or her own business and territory?
• Does the employee determine the manner and method for selling the company's product, or does he or she instead merely deliver key messages or adhere to scripts developed by the company?
• Does the employee determine his or her own schedule or routing for his or her sales calls, or does he or she instead merely follow a call list developed by the company?
• Is the employee responsible for generating his or her own business plans and ideas on how to grow the business?
• Does the employee have the authority to negotiate contract terms?

Highly Compensated Exemption

• Is the employee's total compensation (including commissions and nondiscretionary compensation) at least $100,000 per 12-month period?
• Does the employee customarily and regularly perform at least one of the exempt duties or responsibilities of an executive, administrative or professional employee?

To avoid potential liability for misclassification under the FLSA, employers may wish to consult with outside counsel to develop a comprehensive compliance strategy.