In re Novartis Wage and Hour Litigation

This case was before the Second Circuit on Plaintiffs’ appeal of the lower Court’s Order granting Defendant summary judgment, which held that Plaintiffs, Pharmaceutical Representatives, were exempt from the overtime provisions of the FLSA under both the outside sales exemption and the administrative sales exemption.  Reversing the Court below, the Second Circuit held that, based on their duties, the Plaintiffs were neither outside sales exempt nor administrative sales exempt.

Discussing the outside sales exemption first, the Court explained:

“We note that the distinction between obtaining commitments to buy and promoting sales by other persons has been respected in areas other than the pharmaceutical industry. See, e.g., Gregory v. First Title of America, Inc., 555 F.3d 1300, 1309 (11th Cir.2009) (employee who obtained commitments to buy her employer’s title insurance service and was credited with those sales, and all of whose efforts were directed towards the consummation of her own sales and not towards stimulating sales for the employer in general, was an outside sales employee within the meaning of the FLSA and the regulations); Clements v. Serco, Inc., 530 F.3d 1224, 1228 (10th Cir.2008) (civilian military recruiters who did not obtain commitments from recruits were not outside salesmen within the meaning of, e.g., 29 C.F.R. § 541.504); Wirtz v. Keystone Readers Service, Inc., 418 F.2d 249, 253, 260 (5th Cir.1969) (“student salesmen” were not outside sales employees where their promotional activities were incidental to sales made by others).

We think it clear that the above regulations, defining the term “sale” as involving a transfer of title, and defining and delimiting the term “outside salesman” in connection with an employee’s efforts to promote the employer’s products, do far more than merely parrot the language of the FLSA. The Secretary’s interpretations of her regulations are thus entitled to “controlling” deference unless those interpretations are “ ‘plainly erroneous or inconsistent with the regulation.’ “ Auer, 519 U.S. at 461 (quoting Robertson v. Methow Valley Citizens Council, 490 U.S. 332, 359 (1989) (other internal quotation marks omitted)).

We find no such inconsistency and see no such error. Although Novartis contends that the position taken by the Secretary as amicus on this appeal is contrary to the regulations, we disagree. The basic premise of the regulations explaining who may properly be considered an exempt “outside salesman”-a term for which the FLSA explicitly relies on the Secretary to promulgate defining and delimiting regulations-is that an employee is not an outside salesman unless he does “in some sense make the sales,” 2004 Final Rule at 22162. And although that phrase (on which Novartis relies heavily (see, e.g., Novartis brief on appeal at 12, 22, 25, 29)) does not appear in any of the regulations that explicate the term “outside salesman,” the regulations quoted above make it clear that a person who merely promotes a product that will be sold by another person does not, in any sense intended by the regulations, make the sale. The position taken by the Secretary on this appeal is that when an employee promotes to a physician a pharmaceutical that may thereafter be purchased by a patient from a pharmacy if the physician-who cannot lawfully give a binding commitment to do so-prescribes it, the employee does not in any sense make the sale. Thus, the interpretation of the regulations given by the Secretary in her position as amicus on this appeal is entirely consistent with the regulations.

Nor can we conclude that the regulations constitute an erroneous interpretation of the FLSA definition of “sale” to “include [ ] any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition,” 29 U.S.C. § 203(k). Although the phrase “other disposition” is a catch-all that could have an expansive connotation, we see no error in the regulations’ requirement that any such “other disposition” be “in some sense a sale.” Such an ejusdem generis-type interpretation is consistent with the interpretive canon that exemptions to remedial statutes such as the FLSA are to be read narrowly, see Arnold, 361 U.S. at 392; see generally A.H. Phillips, Inc. v. Walling, 324 U.S. 490, 493 (1945), and is neither erroneous nor unreasonable, see, e.g., Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842-43 (1984). We accordingly owe the Secretary’s interpretation deference, and we turn to the question of its applicability to the present cases.

There is no genuine dispute over the sales path generally traversed by Novartis pharmaceuticals. As described in Part I.A. above, Novartis sells its drugs to wholesalers; the wholesalers then sell them to pharmacies; and the pharmacies ultimately sell the drugs to patients who have prescriptions for them. The Reps promote the drugs to the physicians; the Reps do not speak to the wholesalers or to the pharmacies or to the patients.

Nor is there any dispute as to what occurs during the Reps’ “sales” calls on physicians. The meetings are brief-generally less than five minutes-and the physicians neither buy pharmaceuticals from the Reps nor commit to buying anything from the Reps or from Novartis. The Reps may give physicians free samples, but the Reps cannot transfer ownership of any quantity of the drug in exchange for anything of value. The physician is of course an essential step in the path that leads to the ultimate sale of a Novartis product to an end user; a patient cannot purchase the product from a pharmacy without a prescription, and it is the physician who must be persuaded that a particular Novartis drug may appropriately be prescribed for a particular patient. But it is reasonable to view what occurs between the physicians and the Reps as less than a “sale.”

Novartis suggests that “sale” should be read broadly in light of the statement in the Preamble that “ ‘[e]mployees have a primary duty of making sales if they “obtain a commitment to buy ” from the customer and are credited with the sale.’ “ (Novartis brief on appeal at 23 (quoting 2004 Final Rule at 22162) (emphases in brief).) It argues that the Reps “make sales in some sense” because “they are responsible for eliciting commitments from the physicians on whom they call to write prescriptions for NPC drugs and that these prescriptions are, in essence, orders for NPC drugs to be used by the patients in purchasing the drugs from pharmacies.” (Novartis brief on appeal at 25-26 (emphasis in original) (internal quotation marks omitted).) Novartis’s emphatic reliance on the word “commitments,” however, does not lead to a conclusion that the Reps make sales, for it ignores the nature of the “commitment” expressly envisioned by the Secretary in enacting the regulations: “a commitment to buy,” 2004 Final Rule at 22162, 22163 (emphasis added). The type of “commitment” the Reps seek and sometimes receive from physicians is not a commitment “to buy” and is not even a binding commitment to prescribe. As the district court noted, “physicians have an ethical obligation to prescribe only drugs suitable for their patients’ medical needs, meaning that they cannot make a binding commitment to a Rep to prescribe ” a particular Novartis product. Novartis I, 593 F.Supp.2d at 650 (emphasis added). Thus, although physicians may say that they will prescribe a given Novartis drug for patients with appropriate diagnoses, such an assurance is not a binding commitment, and physicians remain entirely free to prescribe a competing product made by a company other than Novartis.

In sum, where the employee promotes a pharmaceutical product to a physician but can transfer to the physician nothing more than free samples and cannot lawfully transfer ownership of any quantity of the drug in exchange for anything of value, cannot lawfully take an order for its purchase, and cannot lawfully even obtain from the physician a binding commitment to prescribe it, we conclude that it is not plainly erroneous to conclude that the employee has not in any sense, within the meaning of the statute or the regulations, made a sale.

Novartis points out that a number of district courts have held that pharmaceutical sales representatives are exempt from the FLSA overtime pay requirements as outside salesmen (and/or administrative employees). Those cases are, of course, not binding on us, and their reasoning does not persuade us that the Secretary’s interpretations of the regulations should be disregarded. To the extent that the pharmaceuticals industry wishes to have the concept of “sales” expanded to include the promotional activities at issue here, it should direct its efforts to Congress, not the courts. Given the existing statute and regulations, we conclude that the district court should have ruled that the Reps are not outside salesmen within the meaning of the FLSA and the regulations.”

Next the Court rejected the lower Court’s holding that the Plaintiffs were administratively exempt:

“On appeal, the Reps contend that they do “low-level, discretionless marketing work, strictly controlled by Novartis,” and that their duties and authority do not satisfy the requirements for applicability of the administrative employee exemption. (Plaintiffs’ brief on appeal at 40.) Novartis, in contending that the Reps exercise discretion and independent judgment, argues that the Reps, for example, “must determine how best to develop a rapport with a physician and develop strategies to engage physicians in an interactive dialogue to draw out their patient concerns, treatment styles and predilections”; must “be able to react to expressed physician concerns by emphasizing particular clinical findings regarding the efficacy and safety of NPC’s drugs for specific patient types”; “must determine when and how to deliver the [Novartis-determined core] message, taking into consideration,” e.g., “the prior call history with each physician, the physician’s time constraints, expressed concerns, prescription-writing tendencies and patient population”; and must “determine how best to close each call by evaluating whether sufficient groundwork has been laid to seek the physician’s commitment on that call to write prescriptions.” (Novartis brief on appeal at 50-51.)

The Secretary points out that the regulations make clear that the requirement for authority to “exercise … discretion and independent judgment” means more than simply the need to use skill in applying well-established techniques or procedures prescribed by the employer, see 29 C.F.R. § 541.202(e). The Secretary takes the position that for the administrative exemption to apply to the Reps, the regulations require a showing of a greater degree of discretion, and more authority to use independent judgment in matters of significance, than Novartis allows the Reps. Again we find it appropriate to defer to the Secretary’s interpretation.

Comparing the record as to the Reps’ primary duties against the illustrative factors set out in § 541.202(b), for example, we see no evidence in the record that the Reps have any authority to formulate, affect, interpret, or implement Novartis’s management policies or its operating practices, or that they are involved in planning Novartis’s long-term or short-term business objectives, or that they carry out major assignments in conducting the operations of Novartis’s business, or that they have any authority to commit Novartis in matters that have significant financial impact. Although Novartis argues that the Reps do commit Novartis financially when they enter into contracts with hotels, restaurants, and other venues for promotional events, “which may cost NPC thousands of dollars” (Novartis brief on appeal at 3-4), the record reveals that the Reps have been given budgets for such events by the Novartis managers and that the Reps have no discretion to exceed those budgets. Nor have we been pointed to any evidence that the Reps have authority to negotiate and bind Novartis on any significant matters, or have authority to waive or deviate from Novartis’s established policies and procedures without its prior approval. What Novartis characterizes as the Reps’ exercise of discretion and independent judgment-ability to answer questions about the product, ability to develop a rapport with a physician who has a certain social style, ability to remember past conversations with a given physician, ability to recognize when a message has been persuasive-are skills gained and/or honed in their Novartis training sessions. As described in Part I.A. above, these skills are exercised within severe limits imposed by Novartis. Thus, it is undisputed that the Reps, inter alia,

• have no role in planning Novartis’s marketing strategy;

• have no role in formulating the “core messages” they deliver to physicians;

• are required to visit a given physician a certain number of times per trimester as established by Novartis;

• are required to promote a given drug a certain number of times per trimester as established by Novartis;

• are required to hold at least the number of promotional events ordered by Novartis;

• are not allowed to deviate from the promotional “core messages”;

• and are forbidden to answer any question for which they have not been scripted.

Novartis argues that the Reps exercise a great deal of discretion because they are free to decide in what order to visit physicians’ offices, free to decide how best to gain access to those offices, free to decide how to allocate their Novartis budgets for promotional events, and free to determine how to allocate their samples. (See Novartis brief on appeal at 51.) In light of the above controls to which Novartis subjects the Reps, we agree with the Secretary that the four freedoms advanced by Novartis do not show that the Reps are sufficiently allowed to exercise either discretion or independent judgment in the performance of their primary duties. Accordingly, we conclude that the district court should have ruled that the Reps are not bona fide administrative employees within the meaning of the FLSA and the regulations.”

To read the entire decision, click here.

EDITOR’S NOTE:  On the same day it handed down this decision, the Second Circuit also affirmed, by summary order, the decision from a lower court that held pharmaceutical representatives employed by Schering Corp. were not outside sales exempt under the FLSA.  To read the entire summary order in Kuzinski v. Schering Corp., click here.