Overtime Law Blog

Baum v. AstraZeneca LP

Addressing the oft-raised (recently) issue of whether pharmaceutical sales representative employees are subject to the Outside Sales exemption, the District Court answered the question in the affirmative and granted Defendant’s Motion for Summary Judgment on the issue. The Court went through a strained analysis of the pharmaceutical industry to reach this conclusion, and ultimately, seems to have refused to follow the long-standing mandate of FLSA construction that exemptions be narrowly construed against employers asserting them. The Court ultimately determined that the promotional work that sales reps do as their primary duty represents “sales” within the meaning of the FLSA, despite the fact that the sales reps do not actually obtain sales from anyone.

“The Court now returns to the definition of “sale”, and the somewhat related question of when a sale actually occurs. Obviously, a pharmaceutical sale is not exactly final until the patient herself completes a transaction by taking the physician permission slip (prescription) to a pharmacist for completion of the sale. However, the statutory language does not require a final sale, complete and consummated. Thus, pursuant to the above industry specifics, the Court believes that a “sale” may be defined as substantially occurring at the moment a physician commits to prescribing a particular pharmaceutical when treating a particular patient. In Clements v. Serco, in considering this question under the FLSA, the Tenth Circuit explained: “the touchstone for making a sale, under the Federal Regulations, is obtaining a commitment.” 530 F.3d 1224, 1227 (10th Cir.2008). Importantly, the facts of the case sub judice illustrate that the PSS’s were trained and employed for the purpose of obtaining a commitment, which is the “touchstone” for making a sale.

The Court concludes that in the pharmaceutical industry, the strongest evidence for sales activity and being employed for the purpose of making sales, is that the employee obtains commitments from physicians. Ms. Baum did precisely that: after carefully preparation and planning, she skillfully asked physicians for commitments to prescribe AstraZeneca products in appropriate situations. The capacity of a salesperson to obtain such commitments, in any field, is rare, and consequently well-compensated by private industry; the effort and charisma required to successfully close, as will be discussed infra, is a hallmark of professional sales activity.

Consequently, the Court holds that in the pharmaceutical context, given the realities of the professional paradigm, a sale occurs when a physician commits to prescribe a certain product in a certain situation. Therefore, the Court believes that a pharmaceutical sales representative, upon obtaining a commitment from a physician, has “in some sense” made a sale. See Dep’t of Labor, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees; Final Rule, Fed.Reg. 22122, 22162-63 (Apr. 23, 2004). Relatedly, where a pharmaceutical sales representative seeks to obtain a physician’s professional commitment to prescribe certain pharmaceuticals, that representative was engaged in making sales. Importantly, Ms. Baum was not visiting the physician only to provide some education or background to pave the way, or prepare the physician for another appointment with a primary salesperson.

This Court believes that other courts, and perhaps regulatory agencies, underestimate the significance of this oral commitment from physicians. In part, this error emerges from a misunderstanding of the ways in which human beings are socially and informally motivated. Sometimes lawyers and judges forget that a person’s word means something; remarkably, many people do not actually need a 400-page contract to bind themselves to their word. Yale’s Yochai Benklar, a thinker with incisive prescience, explains that non-market intrinsic factors can serve as a more powerful motivating force than typical extrinsic economic incentives; applying such a theory to this situation, it is possible to imagine one business that thrives over time, enjoying ongoing, non-contractual relationships with its clientele, while a nearly identical business falters, its obsession with formalized contracts driving away a clientele socially frustrated with the non-trusting relationship. In short, this Court believes that one professional’s commitment may be worth more in sales volume than a hundred firm orders from a insolvent or dishonest source. A proper critique of this interpretation of “sale” is that such reasoning, if applied in a broader sense across industries, would quickly arrive at an unsustainable breaking point. However, this Court is not broadening the definition of “sale”, but simply seeking to understand and apply the definition within this particular industry. See In Re Novartis Wage and Hour Lit., 593 F.Supp.2d 637, 659 (“Reps make sales in the sense that sales are made in the pharmaceutical industry.”). For all of the above reasons, this Court, in performing its own construction and application of this statutory exemption, finds that in the pharmaceutical context, where a representative asks for a commitment from a physician, such activity is sales activity for the purposes of the Pennsylvania outside sales exemption.

Admittedly, this construction and application has its weaker points: obviously, not every sale defined this way will actually result in the delivery of a pharmaceutical in exchange for legal tender. Furthermore, other courts, assessing different industries, have held that individuals seeking to obtain commitments are not necessarily performing exempt sales activity. See, e.g., Clements v. Serco, 530 F.3d 1224, 1227 (10th Cir.2008). Ms. Baum’s briefing hopes to capitalize upon this particular weak point, arguing that even when a physician commits to writing a prescription for AstraZeneca’s pharmaceuticals, this commitment is certainly not binding upon either the physician or a patient. However, the rationale of such a critique could be equally applied to sales transactions in simpler fields. For instance, where a hypothetical Mr. Loman sells a widget, but the widget is ultimately returned six months later under a warranty claim, did a sale actually occur? Was the sale binding? Given this country’s aggressive implied warranty laws, is any sale ever binding? While the Court is certain that Mr. Loman engaged in the process of making sales or obtaining orders, the question presents itself: is any traditional sale more or less binding than a commitment sought and obtained from a honest and thoughtful physician? Admittedly, in the pharmaceutical context, obtaining a commitment from a doctor may not be a formal, binding contract that inexorably leads to the exchange of goods and services. However, the Court believes such formalities are simply not necessary for a “sale” to occur. The Court notes that private companies perhaps have a wiser approach to discerning what constitutes a sale: rather than wasting effort and energy arguing about how to apply abstract and reduced definitions to diverse industries, such companies simply find and execute the methods that work to increase sales; notably, pharmaceutical companies have all decided to employ large, direct sales forces to visit physicians.

The Court also acknowledges that physicians are not the only customer involved in the sale of pharmaceuticals. However, it cannot be argued that physicians are not an integral and essential gatekeeper within this sales process. In some, likely most, instances, physicians will be the dispositive force behind a sale. Furthermore, in all instances, a physician’s approval and consent to the sale is ultimately necessary. Other courts, in expressing their analyses of this pharmaceutical sales dynamic, have similarly stated the integral role of physicians in the sale of a pharmaceutical. See Barnick v. Wyeth, 522 F.Supp.2d 1257, 1264 (C.D.Cal.2007)(explaining that because physicians “determine whether or not a patient will buy a prescription product”, the physicians themselves are the appropriate target of sales efforts); see also D’Este v. Bayer Corp., No. 07-cv-3206, 2007 U.S. Dist. LEXIS 87229, at *14 (C.D.Cal. Oct. 9, 2007) (emphasizing that the doctor places the order for the prescription product by writing a prescription).

In sum, in a determination unnecessary to present to a jury, and following an analysis of the dynamics of the industry, this Court finds that where pharmaceutical representatives seek to obtain physician commitments to write prescriptions, these representatives make sales and are engaged in the process of making sales for purposes of Pennsylvania’s outside sales exemption. In the alternative, this Court notes that a similar analysis could also be applied to pharmaceutical sales representatives “obtaining orders.” Consequently, a pharmaceutical sales representative performing duties similar to those performed by Ms. Baum, including visiting the offices of physicians for the purposes of obtaining commitments, meets this requirement of the outside sales exemption.”

Kuzinski v. Schering Corp.

Plaintiffs initiated this suit against Schering Corporation, their former employer, for relief from Defendant’s alleged misclassification of them as “exempt” employees resulting in its failure to pay them overtime wages, in violation of the Fair Labor Standards Act (FLSA), 29 U.S.C. §§ 201 et seq. Defendant moved for summary judgment on the ground that Plaintiffs fall within the FLSA’s outside sales exemption. After an extensive review and discussion of the record evidence, the Court denied Defendant’s motion for summary judgment.

In denying Defendant’s motion, the Court made clear that the promotional work which Plaintiffs, as pharmaceutical sales reps, performed for Defendant was not “sales” within the meaning of the FLSA. The Court addressed head-on supporting cases as well as those which Defendant had argued supported a contrary finding:

“Under the FLSA, the term ” ‘[s]ale’ or ‘sell’ includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition,”29 U.S.C. § 203(k), and also “include[s] the transfer of title to tangible property, and in certain cases, of tangible and valuable evidences of intangible property,”29 C.F.R. § 541.501(b). Schering’s PSRs do not make, or engage in, any of these things. PSRs do not consummate or make any “sales” of pharmaceuticals to the physicians they visit. PSRs do not “exchange” with physicians for any drugs; they do not make any “contract[s] to sell” drugs to physicians; they do not make any “consignment for sale” with physicians; FN13 they do not make any “shipment[s] for sale” to physicians; and they do not make any “other disposition” of drugs with physicians.FN14 PSRs also do not “transfer [pharmaceuticals] for a price.” Cf.BLACK’S LAW DICTIONARY 1364 (8th ed.2004) (defining “sale”).

FN13. That is, PSRs do not “commit,” “dedicate,” “deliver,” “transfer,” “give” or “hand over possession” drugs into the physicians’ “custody,” or “entrust” drugs to physicians, for a later sale. See BLACK’S LAW DICTIONARY 327 (8th ed.2004) (defining “consign” and “consignment”); WEBSTER’S II DICTIONARY 157 (3d ed.2005) (same).

FN14. Plaintiffs did not “transfer[ ] something to [a physician’s] care or possession” including “by deed or will,” and they did not engage in the “relinquishment of property” to physicians. See BLACK’S LAW DICTIONARY 505 (8th ed.2004) (defining “disposition”). Given this meaning of “disposition,” Defendant’s argument that the regulation’s catch-all term “other disposition” encompasses in its scope activities such as those performed by Plaintiffs is unavailing. Were the Court to construe the phrase “other disposition” broadly enough to encompass PSRs’ visits with physicians (see Def.’s Mem. Supp. at 22 (emphasizing phrase); Oral Arg. Tr. at 40:5-41:15 (Schering arguing that the phrase “allow[s] for those instances where there cannot be a direct interaction between the salesman and the purchaser”)), it would substantially expand the outside sales exemption, in direct contravention of its mandate to construe the exemption narrowly and within its plain terms.

Moreover, PSRs and physicians do not even have the capacity to consummate sales. Schering’s PSRs, like Boehringer’s PSRs, are barred both by law and by their employer from entering into contracts or binding commitments with physicians for the prescription of their employer’s products. Cf. Ruggeri I, 585 F.Supp.2d at 267-68 (PSRs “do not and cannot make or produce” sales); accord Smith, 2008 WL 5427802, *7, 2008 U.S. Dist. LEXIS 104952, *20-*21 (“in no ordinary sense of the word ‘consummation’ could one of [the PSR’s] sales calls end in the consummation of a sale. [The PSR] could only provide useful information to the physician, and could not enter into an agreement regarding prescriptions by the physician.”). And physicians neither have nor exercise the capacity to make binding commitments to purchase or prescribe pharmaceuticals promoted by Schering’s PSRs. DeFeo testified that physicians never order pharmaceuticals directly from Schering even in potential “emergency” situations, when they would obtain them directly through a “group purchasing organization,” and in any event ethical and legal obligations bar physicians from “mak[ing] a binding commitment to a[PSR] to prescribe certain [pharmaceutical] products.” In re Novartis, 593 F.Supp.2d at 650;see also Ruggeri I, 585 F.Supp.2d at 268 (“physicians do not have ‘the capacity to purchase or place an order for’… pharmaceutical products”).

The conclusion that PSRs fall within the outside sales exemption from FLSA’s overtime provisions on the basis of “the characteristics of the industry in question,” In re Novartis, 593 F.Supp.2d at 649,“[n]otwithstanding PSRs’ lack of capacity to sell, and physicians’ lack of capacity to purchase,”see Ruggeri I, 585 F.Supp.2d at 268, appears to be the back-fitting of the FLSA to industry practices which this Court has rejected, see id. at 272;see also Clements, 530 F.3d at 1227 (“[t]he touchstone for making a sale, under the Federal Regulations, is obtaining a commitment.”); Smith, 2008 WL 5427802, *7, 2008 U.S. Dist. LEXIS 104952, *19 (“[p]hysicians … do indeed present a chokepoint in the sale of pharmaceuticals, but the nature of the prescription system insulates them from being amenable to ‘sales’ within the definition of the applicable regulation”).In re Novartis’s focus on a pharmaceutical product’s “purchase cycle,” which “commences” with a physician writing a prescription for the product for a patient, In re Novartis, 593 F.Supp.2d at 650-51, and which, in this case, presumably would continue through a patient’s filling the prescription at a pharmacy, to the pharmacy’s re-ordering the product from a wholesaler, who then places an order for additional product with the “trade organization” and “legal team” operating under Schering’s managed markets group, is not what the PSRs do, which excludes it from the relevant inquiry for FLSA purposes.

As DeFeo’s testimony and Plaintiffs’ declarations illustrate, the closest that Schering’s PSRs come to consummating “sales” is increasing the overall demand for its products, such that non-PSR Schering employees negotiate and commit to contracts with wholesalers-not the physicians to whom Schering’s products are promoted. An employee does not consummate a “sale” for purposes of the FLSA merely by “lay[ing] the groundwork” for another employee to obtain a customer’s commitment. Clements, 530 F.3d at 1229;29 C.F.R. § 541.503(a) (even though promotional work can be considered exempt sales work, “promotional work that is incidental to sales made, or to be made, by someone else is not exempt outside sales work”) (emphasis added). Here, not only do the PSRs not consummate the sales, but the physicians with whom the PSRs visit are not Schering’s customers. To the extent PSRs lay foundation or groundwork, it is to increase or maintain their employer’s market share for the products they promote. In this sense they pave the way for sales but in no more direct a manner as a pharmaceutical company’s direct-to-consumer advertising, which raises demand for that company’s products. Neither of these activities constitutes “sales” under the FLSA.

The Eleventh Circuit’s decision in Gregory v. First Title of America, Inc. is not to the contrary. There, the court held that an insurer’s “marketing executive” made sales-and thus was an exempt outside salesperson-because “[o]nce an order for title insurance services is obtained [by the plaintiff], the sale is complete.” 555 F.3d 1300, 1309 (11th Cir.2009) (first alteration in original). The court relied on the fact that the plaintiff “did not collect orders and turn them over to another salesperson,” and there was no “evidence of any other intervening sales effort between [the plaintiff] and orders placed with [the employer],” such that “[a]s opposed to conceiving of [the plaintiff] as ‘paving the way’ for others to consummate the sale, we view her as acting more as a conduit through which orders for services flowed.”Id. The critical difference between the work of First Title’s marketing executive and Schering’s PSRs is obvious: whereas the marketing executive did all of the work necessary to reach an agreement with a customer, PSRs do not even communicate with the entities to which Schering sells its products, let alone negotiate the contracts or process the orders by which its products are sold.

Some courts concluding that PSRs “sell” pharmaceutical products within the meaning of the FLSA have looked to IMS Health Inc. v. Ayotte, 550 F.3d 42 (1st Cir.2008). There, the court was faced with a constitutional challenge to the Prescription Information Law, a New Hampshire statute affecting PSRs’ work by preventing the use ” ‘for any commercial purpose’ ” of information about pharmaceutical prescriptions containing any ” ‘patient-identifiable and prescriber-identifiable data.’ ” Id. at 47 (quoting N.H.Rev.Stat. Ann. § 318:47-f). In the course of lengthy opinions upholding the constitutionality of the law, both the majority and concurrence/dissent described generally the work of PSRs-in the First Circuit’s parlance, “detailers”-within the pharmaceutical industry. The majority described each part of the state’s evidence that its law “directly advances [its] interest” of “cost containment” as “forg[ing] some part of the causal chain leading from transfers of prescribers’ histories for use in detailing to higher drug prices,” id. at 55, and stated: “[d]etailing works: that it succeeds in inducing physicians to prescribe larger quantities of brand-name drugs seems clear (even if the exact magnitude of that effect is not),” id. at 56.In an opinion concurring and dissenting, one member of the panel used the word “sales” in describing the efficacy of PSRs’ efforts: “Detailing is the face-to-face advocacy of a product by sales representatives who visit doctors’ offices and hospitals to meet with the prescribing health care professionals. Although the objective of these visits is to make sales, detailers often provide valuable information about the drugs they are selling.” Id. at 71 (Lipez, J., concurring and dissenting).”

In denying Defendant’s motion, the Court further stated, “[i]t is the clarity of the statutory and regulatory language at issue defining the conduct and activity which constitutes “selling” or making a “sale” which undermines Schering’s use of the term “sales” to classify PSRs’ work as exempt from FLSA’s overtime pay provisions and which renders unpersuasive other cases’ characterizations of PSRs’ work. Because PSRs undisputedly do not “sell” or make any “sales” as those terms are defined in the FLSA and its implementing regulations, they fall outside the FLSA’s outside sales exemption.”