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.”