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2d. Cir.: Individualized Damages Determinations Alone Cannot Preclude Class Certification Under Rule 23’s Predominance Inquiry

Roach v. T.L. Cannon Corp.

This case presented the question of whether the Supreme Court’s decision in Comcast Corp. v. Behrend, ––– U.S. ––––, 133 S.Ct. 1426, 185 L.Ed.2d 515 (2013), overruled the well-established law in the Second Circuit that class certification pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure cannot be denied merely because damages have to be ascertained on an individual basis. The court below had held that Comcast permits certification under Rule 23(b)(3) only when damages are measurable on a classwide basis, and denied the plaintiffs’ motion for class certification. The Second Circuit disagreed, and held that Comcast does not mandate that certification pursuant to Rule 23(b)(3) requires a finding that damages are capable of measurement on a classwide basis, in the context of this wage and hour case.

The court began by summarizing Second Circuit case law prior to the Comcast decision, and explaining that Comcast did not overrule the line of cases that had long held that individualized damages will not preclude class certification generally:

Prior to the Supreme Court’s decision in Comcast, it was “well-established” in this Circuit that “the fact that damages may have to be ascertained on an individual basis is not sufficient to defeat class certification” under Rule 23(b)(3). Seijas v. Republic of Argentina, 606 F.3d 53, 58 (2d Cir.2010); see McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 231 (2d Cir.2008), abrogated in part on other grounds by Bridge v. Phx. Bond & Indem. Co., 553 U.S. 639, 128 S.Ct. 2131, 170 L.Ed.2d 1012 (2008); see also Dukes, 131 S.Ct. at 2558 (“[I]ndividualized monetary claims belong in Rule 23(b)(3).”). “[T]he fact that damages may have to be ascertained on an individual basis” was simply one “factor that we [had to] consider in deciding whether issues susceptible to generalized proof ‘outweigh’ individual issues” when certifying the case as a whole. McLaughlin, 522 F.3d at 231.

We do not read Comcast as overruling these decisions.

The court then discussed and distinguished Comcast:

In Comcast, the plaintiffs filed a class-action antitrust suit claiming that Comcast’s acquisition of competitor cable television providers in sixteen counties clustered around Philadelphia violated the Sherman Act. 133 S.Ct. at 1430. Comcast’s clustering strategy had increased its market share in that geographical area from around twenty to seventy percent. Id. The plaintiffs sought to certify the class of Comcast subscribers in that geographical area under Rule 23(b)(3), claiming that questions of law and fact common to the class predominated over any questions affecting individual members. Id. The district court held, and neither the plaintiffs nor defendants contested on appeal, that in order to meet the predominance requirement, the plaintiffs had to show that: (1) the injury suffered by the class was “capable of proof at trial through evidence that [was] common to the class rather than individual to its members”; and (2) “the damages resulting from [the anticompetitive] injury were measurable on a class-wide basis through use of a common methodology.” Id. (first alteration in original) (quoting Behrend v. Comcast Corp., 264 F.R.D. 150, 154 (E.D.Pa.2010)) (internal quotation marks omitted).

The plaintiffs offered four theories of antitrust injury or impact, only one of which the district court concluded was susceptible of classwide proof: Comcast’s clustering around Philadelphia reduced competition from “overbuilders,” competitors who build competing cable networks where there exists an incumbent cable provider.FN4
Id. at 1430–31. To prove that the damages resulting from the anticompetitive injury were measurable on a classwide basis, the plaintiffs offered expert testimony that modeled the class damages based on all four theories of antitrust injury; the model did not isolate damages resulting from the “overbuilder” theory. Id. at 1431. Nevertheless, both the district court and the United States Court of Appeals for the Third Circuit concluded that the expert testimony was sufficient to establish that damages resulting from the “overbuilder” theory of injury were measurable on a classwide basis. Id. Rejecting the notion that the plaintiffs were required to offer a model of classwide damages that attributed damages only to the “overbuilder” theory of injury, the Court of Appeals explained that the plaintiffs were required merely to provide assurance that, “if they can prove antitrust impact, the resulting damages are capable of measurement and will not require labyrinthine individual calculations.” Id. at 1431 (quoting Behrend v. Comcast Corp., 655 F.3d 182, 206 (3d Cir.2011)) (internal quotation mark omitted). A more rigorous analysis, the Court of Appeals concluded, would constitute an “attac[k] on the merits of the methodology [that] [had] no place in the class certification inquiry.” Id. (first and third alterations in original) (quoting Behrend, 655 F.3d at 207) (internal quotation marks omitted).

The Supreme Court granted certiorari. After noting that neither party had contested the district court’s holding that Rule 23(b)(3) predominance required a showing that damages resulting from the anticompetitive injury were measurable on a classwide basis, id. at 1430, the Court identified the question presented as whether the plaintiffs “had … establish[ed] that damages could be measured on a classwide basis,” id. at 1431 n. 4. The Court reversed, holding that the plaintiffs’ expert testimony failed to carry that burden. Id. at 1432–33.

The Court began by noting that it had recently held that establishing the Rule 23(a) prerequisites to class certification required a “rigorous analysis,” which would “frequently entail ‘overlap with the merits of the plaintiff’s underlying claim.’ ” Id. at 1432 (quoting Dukes, 131 S.Ct. at 2551). Those “same analytical principles,” the Court explained, govern the Rule 23(b) inquiry. Id.

The Court then held that the plaintiffs’ expert testimony did not withstand the “rigorous analysis” for the Rule 23(b)(3) predominance test. The Court explained that the plaintiffs would be entitled only to damages resulting from their theory of injury. Id . at 1433. Thus, “a model purporting to serve as evidence of damages …. must measure only those damages attributable to that theory.” Id. “If the model does not even attempt to do that,” the Court explained, “it cannot possibly establish that damages are susceptible of measurement across the entire class for purposes of Rule 23(b)(3).” Id. Because there was “no question” that the damages model was not based solely upon the “overbuilder” theory of injury certified by the district court, but also included calculations accounting for the three other theories of injury, id . at 1433–34, the Court concluded that “Rule 23(b)(3) cannot authorize treating [cable] subscribers within the Philadelphia cluster as members of a single class,” id. at 1435.

The Second Circuit then explained that Comcast did not hold that a class cannot be certified under Rule 23(b)(3) solely because damages cannot be measured on a classwide basis, as many defendants in many contexts have since argued:

Comcast, then, did not hold that a class cannot be certified under Rule 23(b)(3) simply because damages cannot be measured on a classwide basis. See id. at 1430 (noting that the requirement of a classwide damages model “is uncontested here”); id. at 1436 (Ginsburg and Breyer, JJ., dissenting) (“[T]he decision should not be read to require, as a prerequisite to certification, that damages attributable to a classwide injury be measurable ‘on a class-wide basis.’ “). Comcast’s holding was narrower. Comcast held that a model for determining classwide damages relied upon to certify a class under Rule 23(b)(3) must actually measure damages that result from the class’s asserted theory of injury; but the Court did not hold that proponents of class certification must rely upon a classwide damages model to demonstrate predominance. See id . at 1433; see also In re Deepwater Horizon, 739 F.3d 790, 817 (5th Cir.2014) (construing the “principal holding of Comcast [as being] that a ‘model purporting to serve as evidence of damages … must measure only those damages attributable to th[e] theory’ of liability on which the class action is premised” (ellipsis and second alteration in original) (quoting Comcast, 133 S.Ct. at 1433)); Butler v. Sears, Roebuck & Co., 727 F.3d 796, 799 (7th Cir.2013) (construing Comcast as holding only “that a damages suit cannot be certified to proceed as a class action unless the damages sought are the result of the class-wide injury that the suit alleges” (emphasis in original)); Leyva v. Medline Indus. Inc., 716 F.3d 510, 514 (9th Cir.2013) (interpreting Comcast to hold that class-action plaintiffs “must be able to show that their damages stemmed from the defendant’s actions that created the legal liability”); accord Catholic Healthcare W. v. U.S. Foodservice Inc. ( In re U.S. Foodservice Inc. Pricing Litig.), 729 F.3d 108, 123 n. 8 (2d Cir.2013) (“Plaintiffs’ proposed measure for damages is thus directly linked with their underlying theory of classwide liability … and is therefore in accord with the Supreme Court’s recent decision in Comcast … . “). Indeed, as the Court explained, if all four types of anticompetitive injury had been approved for certification by the district court, the plaintiff’s damages methodology “might have been sound, and might have produced commonality of damages.” Comcast, 133 S.Ct. at 1434.

To be sure, Comcast reiterated that damages questions should be considered at the certification stage when weighing predominance issues, but this requirement is entirely consistent with our prior holding that “the fact that damages may have to be ascertained on an individual basis is … a factor that we must consider in deciding whether issues susceptible to generalized proof ‘outweigh’ individual issues.” McLaughlin, 522 F.3d at 231. The Supreme Court did not foreclose the possibility of class certification under Rule 23(b)(3) in cases involving individualized damages calculations.

The court then noted that its reading of Comcast was consistent with all 4 Circuits to have reached the issue previously:

Our reading of Comcast is consistent with the Supreme Court’s statement in Comcast that its decision turned upon “the straightforward application of class-certification principles.” 133 S.Ct. at 1433. Our reading is also consistent with the interpretation of those Circuits that have had the opportunity to apply Comcast. See AstraZeneca AB v. United Food & Commercial Workers Unions & Emp’rs Midwest Health Benefits Fund (In re Nexium Antitrust Litig.), No. 14–1521, 2015 WL 265548, at *8, *10 (1st Cir. Jan.21, 2015) (explaining that Comcast “simply” requires that a damages calculation reflect the associated theory of liability, and discussing the “well-established” principle that individualized damages do not automatically defeat Rule 23(b)(3) certification); Dow Chem. Co. v. Seegott Holdings, Inc. ( In re Urethane Antitrust Litig.), 768 F.3d 1245, 1257–58 (10th Cir.2014) ( “Comcast did not rest on the ability to measure damages on a class-wide basis.”); In re Deepwater Horizon, 739 F.3d at 817 (rejecting, post-Comcast, the argument “that certification under Rule 23(b)(3) requires a reliable, common methodology for measuring classwide damages” (internal quotation marks omitted)); Butler, 727 F.3d at 801 (holding, upon the Supreme Court’s grant of certiorari, vacatur, and remand in light of Comcast, that “the fact that damages are not identical across all class members should not preclude class certification”); Glazer v. Whirlpool Corp. (In re Whirlpool Corp. Front–Loading Washer Prods. Liab. Litig .), 722 F.3d 838, 860–61 (6th Cir.2013) (noting that Comcast was “premised on existing class-action jurisprudence” and that “it remains the ‘black letter rule’ that a class may obtain certification under Rule 23(b)(3) when liability questions common to the class predominate over damages questions unique to class members”); Leyva, 716 F.3d at 513 (reiterating Ninth Circuit precedent, post-Comcast, that “damage calculations alone cannot defeat certification” (quoting Yokoyama v. Midland Nat’l Life Ins. Co., 594 F.3d 1087, 1094 (9th Cir.2010)) (internal quotation mark omitted)).

Because the trial court did not complete its full analysis under Rule 23, inasmuch as it held that individualized damages alone precluded class certification, the Second Circuit reversed and remanded the case for further findings regarding plaintiffs’ motion for class certification.  Of note, on the same day, in an unreported decision, the Second Circuit affirmed a trial court’s order granting class certification, notwithstanding the defendant-appellant’s argument that individualized damages precluded class certification regarding liability issues.

Click Roach v. T.L. Cannon Corp. to read the entire decision and Jason v. Duane Reade, Inc. to read the unreported decision in that case.

S.D.N.Y.: Delay Caused By the Time Required for Court to Rule on Motion for Conditional Certification Is ‘Extraordinary Circumstance’ Justifying Equitable Tolling

McGlone v. Contract Callers, Inc.

This case was before the court on plaintiff’s motion for conditional certification of a collective action, seeking to permit court approved notice.  The court noted that another court, presented with a similar motion for conditional certification had previously denied same due to very significant differences in the factual circumstances in the employees’ work, depending on location.  Nonetheless the court granted plaintiff’s motion and conditionally certified the case with respect to the district in which the plaintiff was employed.  As discussed here, the court also granted plaintiff’s motion to equitably toll the statute of limitations for putative class members, as of the date the plaintiff filed his motion for conditional certification.  In so doing, the court joined other courts who have held that court delay in issuing a decision on a motion for conditional certification is of itself an “extraordinary circumstance” warranting the tolling of the statute of limitations.

Addressing the equitable tolling issue, the court said:

Normally in a FLSA collective action, the statute of limitations for each plaintiff runs when he or she files written consent with the court electing to join the lawsuit, not when the named plaintiff files the complaint. See 29 U.S.C. § 256(b). However, courts have discretion to equitably toll the limitations period in appropriate cases in order “to avoid inequitable circumstances.” Yahraes v. Restaurant Assocs. Events Corp., 2011 WL 844963, at *1 (E.D.N.Y. Mar.8, 2011). The Honorable Steven M. Gold stated that “the delay caused by the time required for a court to rule on a motion, such as one for certification of a collective action in a FLSA case, may be deemed an ‘extraordinary circumstance’ justifying application of the equitable tolling doctrine.” Id. at *2 (collecting cases). While plaintiffs wishing to pursue their rights cannot sit on them indefinitely, those whose putative class representatives and their counsel are diligently and timely pursuing the claims should also not be penalized due to the courts’ heavy dockets and understandable delays in rulings. Accordingly, the statute of limitations will be tolled as of the date of the filing of this motion.

While courts remain split on this issue, this is a good example of a court ruling on equitable tolling with the remedial purposes of the FLSA in mind.

Click McGlone v. Contract Callers, Inc. to read the entire Opinion.

U.S.S.C.: Court Grants Certiorari to PSRs on Appeal of 9th Circuit Decision Holding Pharma Reps Exempt Under the FLSA’s Outside Sales Exemption

Christopher v. SmithKline Beecham Corp.

In a case with far sweeping ramifications for the pharmaceutical industry and its employees, the Supreme Court has granted certiorari to revisit the Ninth Circuit’s decision that held pharmaceutical representatives (pharma reps) to be exempt under the FLSA’s outside sales exemption, and therefore, entitled to overtime.  The Supreme Court has granted Plaintiff’s Petition for Cert, and therefore the issue remains largely unresolved.  In a decision discussed here, the Second Circuit had previously held that the pharma reps were non-exempt, notwithstanding the pharmaceutical companies’ arguments that they were outside sales and/or administrative exempt.  While, the Third Circuit agreed that pharma reps were not outside salespeople because they did not complete any sales, in several cases, it has reached the conclusion that pharma reps are exempt under the administrative exemption.  Most recently, the Ninth Circuit held that, notwithstanding the fact that pharma reps cannot and do not consummate sales, their promotional activities are close enough to render them exempt under the outside sales exemption.  The Supreme Court has now granted cert in the Ninth Circuit case to potentially resolve the issue.

The Department of Labor had submitted an Amicus Brief in support of the employees in both the Second and Ninth Circuit cases.  While the Second Circuit relied on the DOL’s Brief in large part, reaching its conclusion that the pharma reps are non-exempt, the Ninth Circuit rejected the arguments in the Brief.  Now, the stage is set for the Supreme Court to resolve the conflict between the circuits once and for all.

The 2 certified issues the Supreme Court is set to hear are:

(1) Whether deference is owed to the Secretary of Labor’s interpretation of the Fair Labor Standards Act’s outside sales exemption and related regulations; and (2) whether the Fair Labor Standards Act’s outside sales exemption applies to pharmaceutical sales representatives.

Visit the scotusblog to read the full decision below as well as the parties’ briefings to date in Christopher v. SmithKline Beecham Corp.

D.Conn.: In “Salary Misclassification” Case, Unpaid OT Calculated at Time and a Half Rate, Not FWW

Perkins v. Southern New England Telephone Co.

This case, concerning allegations that the plaintiffs were “salaried misclassified” was before the court on the parties’ cross-motions in limine for a determination as to how damages should be calculated by the jury.  While the defendants argued that they should be entitled to calculate any back wages due at “half-time” pursuant to the fluctuating workweek (“FWW”), the plaintiffs argued that the damages must be calculated using the FLSA’s default methodology of time and a half.  Because the FWW would result in back wages of less than 1/3 of the amount of a time and a half calculation, the stakes were big.  Because this case was not one of first impression, the court surveyed the previous cases from around the country, as well as DOL interpretive bulletins in reaching its decision.  Significantly, the court declined to follow prior Circuit decisions, which it reasoned were not well-founded, instead opting to follow a series of district court decisions that discussed the issue in far more detailed and well-reasoned opinions.

Holding that plaintiffs’ damages were to be calculated at time and a half, the court reasoned:

“Although the Second Circuit has not addressed the use of the fluctuating workweek method in a misclassification case, other Courts of Appeal have applied section 778.114 to misclassification cases. See Clements v. Serco, Inc., 530 F.3d 1224, 1230–31 (10th Cir.2008); Valerio v. Putnam Assocs. Inc., 173 F.3d 35, 40 (1st Cir.1999); Blackmon v. Brookshire Grocery Co., 835 F.2d 1135, 1138 (5th Cir.1988).  None of these cases, however, provide any meaningful analysis regarding the merits of adapting the fluctuating workweek method to the misclassification context.  Instead, the Tenth Circuit and the First Circuit base their finding on another case, Bailey v. County of Georgetown, wherein the Fourth Circuit held that section 778.114 does not require that the employee understand the manner in which overtime pay is calculated in order to apply the fluctuating workweek method. See Bailey v. Cnty. of Georgetown, 94 F.3d 152, 156 (4th Cir.1996). The plaintiffs in Bailey, however, were contesting the rate of overtime they were receiving, not whether they were entitled to overtime at all. See id. at 153–54 (describing the facts of the case). Consequently, Bailey is easily distinguishable from the case at hand. Also failing to address the applicability of the fluctuating workweek method to misclassification cases, Blackmon provides only a cursory explanation of computing overtime according to section 778.114. Blackmon, 835 F.2d at 1138–39.

In contrast, several district courts have held that applying the fluctuating workweek method to a misclassification violates the plain language of section 778.114. Generally, these courts hold that the language of section 778.114 requires both “(1) a clear mutual understanding that a fixed salary will be paid for fluctuating hours, apart from overtime premiums; and (2) the contemporaneous payment of overtime premiums.” See Russell v. Wells Fargo & Co., 672 F.Supp.2d 1008, 1013 (N.D.Cal.2009) (emphasis in original); Ayers v. SGS Control Servs., Inc., 2007 U.S. Dist. LEXIS 19634 at *40–42 (S.D.N.Y. Feb. 27, 2007); Rainey v. Am. Forest & Paper Assoc., Inc., 26 F.2d 82, 100–02 (D.D.C.1998) (finding that as a matter of law, the employer cannot prove a clear mutual understanding or contemporaneous payment of overtime premiums in a misclassification case); see also Urnikis–Negro, 616 F.3d at 678 (“Besides looking forward rather than backward, the interpretive rule plainly envisions the employee’s contemporaneous receipt of a premium apart from his fixed wage for any overtime work he has performed.”); 29 C.F.R. 778.114, supra at 4–5. Because the employer in a misclassification case has necessarily not made any contemporaneous payment of overtime premiums, these courts find that section 778.114 is inapplicable in a misclassification case. In addition, courts have found that assessing damages according to section 778.114 may actually frustrate the purpose of the FLSA. See, e.g., In re Texas EZPawn Fair Labor Standards Act Litig., 633 F.2d 395, 404–05 (W.D.Tex.2008) (using a hypothetical situation to demonstrate that the fluctuating workweek method may result in overtime compensation that is 375% lower than the traditional method, and asserting that using the fluctuating workweek method to calculate damages in misclassification cases allows employers to “escape the time and one-half requirement of the FLSA”).

This court agrees with other district courts that have analyzed this issue and concludes that section 778.114 does not support the use of the fluctuating workweek method in the circumstances presented in this misclassification case.”

As noted by the court, the Second Circuit has not weighed in on this issue as of yet.  Therefore, it will be interesting to see if this case ends up there, giving another Circuit an opportunity to weigh in on this issue, which the Supreme Court recently declined to take up.

Click Perkins v. Southern New England Telephone Co. to read the entire Ruling on the cross-motions in limine.


2d. Cir.: Award of Attorney’s Fees for All Time Worked Cannot Be Based Solely Upon Court’s Observation of Counsel

Scott v. City of New York

This case was before the Second Circuit for the second time on the issue of attorney’s fees.  The plaintiffs prevailed in the underling case, but the plaintiffs’ attorney failed to keep contemporaneous time records.  Nonetheless, following judgment for employees in a Fair Labor Standards Act (FLSA) suit, the trial court awarded plaintiffs’ attorney partial attorney fees.  On the first appeal, the defendant appealed, and plaintiffs’ attorney cross-appealed from denial of certain fees.  In a decision discussed here, the Court of Appeals, 626 F.3d 130, vacated the initial fee award and remanded because the district court did not explain the basis on which attorney was excepted from requirement to submit contemporaneous time records with fee application.  Upon remand, the District Court, 2011 WL 867242, reinstated original award, and based the award on its own observations of plaintiffs’ counsel during the case.  Both parties appealed.  The Second Circuit held that the district court’s personal observation and opinions of attorney (alone) did not constitute exceptional circumstances that permitted award of attorney’s fees.  Thus, the case was again remanded for a finding as to reasonable attorney’s fees.

The court reasoned:

“An award based entirely on the district court judge’s personal observation and opinions of the applying attorney, however, is contrary to Carey and must be vacated. If nothing else, permitting that basis for what should be a rare exception is completely unfair to an attorney who has done identical work, failed to keep the required contemporaneous records but whose reputation is unknown to the judge. It would also be unfair to that lesser-known attorney who has done good work but for one reason or another has failed to impress the judge. Moreover, such an “exception” is not an exception to the Carey rule at all. It is an abrogation. We interpreted Carey as conditioning attorney’s fees on contemporaneous records in all but the “rarest of cases.” Scott, 626 F.3d at 133. A district court judge has an opportunity to see and evaluate a lawyer’s work in all cases. On appellate review there are additional considerations. As we recognized in Carey, it is difficult if not impossible for courts of appeal to meaningfully review awards based entirely on a district court’s sense of fairness. 711 F.2d at 1147. Without contemporaneous records “we have little choice but to show considerable deference to the District Court’s conclusion as to how many hours were reasonably compensable.” Id. Abuse of discretion review in these instances, however, requires a more searching inquiry. While it is true that we will—by default—need to rely on a district court’s estimate of compensable time when Carey’s narrow exception is triggered, such deference is a necessary evil brought about only by some other good reason. It is not a justification unto itself.

We have been pointed to no evidence that would permit us to conclude that this case falls within an exception to the Carey rule that would justify an award of all the fees for time that might be documented by an attorney’s contemporaneous records. Nonetheless, we are persuaded that Puccio should be eligible to recover limited fees for any contemporaneously documented time that he was physically before the district court. We thus hold that entries in official court records (e.g. the docket, minute entries, and transcriptions of proceedings) may serve as reliable documentation of an attorney’s compensable hours in court at hearings and at trial and in conferences with the judge or other court personnel. Where the court’s docket reflects that Puccio was in the courtroom participating in trial or was in chambers in conference with the judge and other counsel, these entries, comparable to contemporaneous attorney time records, may be effective substitutes for Puccio’s own contemporaneous records. In so holding, we hasten to add that this is not an invitation for district courts to engage in the type of conjecture that has occurred here with respect to Puccio’s purported 120 hours of trial time. Instead, attorneys seeking fees must point to entries in the official court records that specifically and expressly demonstrate their presence before the court and indicate with reasonable certainty the duration of that presence. No accommodation is to be made for travel time or out-of-court preparation because that will vary from attorney to attorney and issue by issue. Finally, we emphasize that the onus of gathering the applicable docket entries and other court records, if any, is on the applying attorney, not the district court. The district courts are under no obligation to award fees based on such time. Our holding today merely clarifies that using such remedies in this limited fashion will not run afoul of Carey if the district court chooses to do so. We believe that such a regime prevents a totally inequitable result in cases such as this while, at the same time, preserving the strong incentive Carey creates for lawyers to keep and submit contemporaneous records.”

Accordingly, the Second Circuit vacated the district court’s order reinstating plaitniffs’ attorney’s fees, and remanded the case to the district court so that plaintiff could submit a new application for attorney’s fees based exclusively on official court records.

As some have noted, the series of decisions rendered in this case seem to be in contradiction to previous Second Circuit jurisprudence, which has not required contemporaneous time records in order to support an award of fees.  Since the Second Circuit did not explicitly overrule its prior cases, it will be interesting to see what effect, if any, the Scott decisions will have on future cases.

Click Scott v. City of New York to read the entire Second Circuit opinion.

2d. Cir.: Where Employee’s Falsification of Time Records Was Carried Out at Employer’s Behest, Employer Cannot Be Exonerated by Fact That Employee Entered Erroneous Hours on Timesheets

Kuebel v. Black & Decker Inc.

This case was before the Second Circuit on Plaintiff’s appeal of an order awarding Defendant summary judgment.  Plaintiff asserted two distinct claims below: (1) that work performed on his PDA and in Defendant’s computer system (at home) extended his continuous workday such that Defendant’s failure to pay him for all time up to including such work was a violation of the FLSA; and (2) that he was entitled to be paid for off-the-clock work that he did not report because his supervisors instructed him not to.  While the court affirmed summary judgment on the “continuous workday” claim, it reversed as to the off-the-clock claim, holding that “[a]t least where the employee’s falsifications were carried out at the instruction of the employer or the employer’s agents, the employer cannot be exonerated by the fact that the employee physically entered the erroneous hours into the timesheets.”

With respect to the off-the-clock claims, the relevant facts cited by the court were:

“[plaintiff] asserts that he falsified his timesheets because his supervisors instructed him not to record more than forty hours per week. He testified that at monthly meetings, “there was always a point that [Idigo] and Mr. Davolt and [another manager] would always indicate that we [Retail Specialists] were not to put more than forty hours on our time sheet,” and that Davolt “told all of the reps that they were only to record forty hours a week, … no matter what they worked during that particular week.” Kuebel further testified that during a personal discussion with Davolt on February 22, 2007, Davolt said to him, “you can’t work overtime, you’re only supposed to put forty hours on your timecard.”

Discussing the viability of the off-the-clock claims that Plaintiff asserts he was owed overtime wages for time he allegedly worked, but admittedly did not report, the court first discussed the general legal principles applicable to FLSA claims where the Plaintiff alleges Defendant failed in its recordkeeping obligations (to maintain accurate time records), under Anderson v. Mt. Clemens Pottery Co., 328 U.S. 680, 686–87 (1946).  The court below had determined that Plaintiff was not entitled to Anderson’s lenient burden of proof where, as here, he acknowledged that he falsified his own records.  However, the Second Circuit disagreed, holding:

“At least where the employee’s falsifications were carried out at the instruction of the employer or the employer’s agents, the employer cannot be exonerated by the fact that the employee physically entered the erroneous hours into the timesheets. As the district court emphasized, Kuebel admits that it was he who falsified his timesheets, notwithstanding B & D’s official policy requiring accurate recordkeeping. But his testimony—which must be credited at the summary judgement stage—was that he did so because his managers instructed him not to record more than forty hours per week. He specifically testified that at company meetings and during discussions with one of his supervisors, it was conveyed to him that he was not to record overtime no matter how many hours he actually worked. In other words, Kuebel has testified that it was B & D, through its managers, that caused the inaccuracies in his timesheets. While ultimately a factfinder might or might not credit this testimony, that is a determination for trial, not summary judgment. In sum, we hold that because Kuebel has presented evidence indicating that his employer’s records are inaccurate—and that although it was he who purposefully rendered them inaccurate, he did so at his managers’ direction—the district court should have afforded Kuebel the benefit of Anderson’s “just and reasonable inference” standard. See Allen, 495 F.3d at 1317–18 (finding just and reasonable inference standard applicable at summary judgment where plaintiffs had not recorded overtime, but “testified that they were discouraged from accurately recording overtime work on their time sheets, and were encouraged to falsify their own records by submitting time sheets that reflected their scheduled, rather than actual, hours”).  A contrary conclusion would undermine the remedial goals of the FLSA, as it would permit an employer to obligate its employees to record their own time, have its managers unofficially pressure them not to record overtime, and then, when an employee sues for unpaid overtime, assert that his claim fails because his timesheets do not show any overtime.”

Given the procedural posture of the case, the court found that Plaintiff had presented an issue of fact for the jury to decide, thus rendering summary judgment inappropriate, reasoning:

“Ultimately, the dispute as to the precise amount of Kuebel’s uncompensated work is one of fact for trial. As stated above, a plaintiff establishes a violation of the FLSA by proving that he performed uncompensated work of which his employer was or should have been aware. The Anderson test simply addresses whether there is a reasonable basis for calculating damages, assuming that a violation has been shown. Brown, 534 F.3d at 596. It does not entitle an employer to summary judgment where the employee’s estimates of his uncompensated overtime are somewhat inconsistent.

The district court further held that, in any event, the following evidence was sufficient to “negate the inference that [Kuebel] had performed work off-the-clock”: (1) B & D’s written policies and training materials stating that time worked must be accurately recorded; (2) Kuebel’s own time records; and (3) Beacon reports for Kuebel showing low in-store hours. Kuebel II, 2010 U.S. Dist. LEXIS 46533, at *39–40. We disagree. B & D’s evidence raises factual and credibility questions for trial, but it does not afford a basis for summary judgment. First, while the existence of B & D’s official policies requiring accurate timekeeping may detract from Kuebel’s credibility, it does not entitle B & D to judgment as a matter of law in light of Kuebel’s testimony that he was instructed by his managers not to record all of his hours. Second, that Kuebel’s timesheets do not show any overtime does not resolve the central question necessitating a trial, which, as we have seen, is whether Kuebel worked overtime but did not record it at his managers’ behest. Finally, to the extent that Kuebel’s Beacon hours—or, for that matter, his manager’s testimony that the condition of his stores was often subpar—suggest that Kuebel typically worked less than forty hours a week, such evidence also raises a factual issue for trial.”

Similarly, the court held that Plaintiff had created an issue of fact despite Defendant’s contention that it lacked knowledge of any unrecorded off-the-clock hours allegedly worked by Plaintiff, stating:

“We conclude that Kuebel has raised a genuine issue of material fact as to whether B & D knew he was working off the clock. Kuebel testified that on several occasions, he specifically complained to his supervisor, Davolt, that he was working more than forty hours per week but recording only forty. The district court discounted Kuebel’s testimony, relying on the fact that he never lodged a formal complaint using B & D’s anonymous reporting hotline. Id. at *44–45. But while that fact might conceivably hurt Kuebel’s credibility at trial, it does not warrant summary judgment for B & D.”

While it remains to be seen whether Plaintiff will actually prevail on his claims, given the FLSA’s non-delegable duty on employers, there can be little question that the Second Circuit reached the correct conclusion in holding that an employer who requires an employee to falsify his or her time records may not then benefit from such falsification.  Stay tuned to see how this one turns out…

Click Kuebel v. Black & Decker Inc. to read the entire opinion.

2d. Cir.: Contested Attorney’s Fee Petition Must Be Accompanied By Contemporaneous Time Records

Scott v. City of New York

After prevailing at trial, the Plaintiff in this Fair Labor Standards Act (FLSA) case, moved for an award of attorney’s fees and costs pursuant to 216(b).  The Defendant opposed the amount of attorney’s fees sought by Plaintiff’s attorney.  The trial court awarded plaintiffs’ attorney partial attorney fees, based on the fees asserted.  The Defendant appealed the award, asserting that the fee award was improper, inasmuch as the Plaintiff’s attorney had not submitted contemporaneous time records in support of his fee application.  Plaintiff’s attorney cross-appealed from denial of certain of those fees.  On appeal, the Second Circuit held that a contested attorney’s fee petition must be accompanied by contemporaneous time records.  Therefore, they remanded the case back to the trial court in order to make a detailed finding regarding appropriate fees to be awarded (or in the alternative to state the basis for an exemption from such requirements).

Click Scott v. City of New York to read the entire opinion.

2d. Cir.: Question Of Joint Employer Is Mixed Question Of Law And Fact, Properly Submitted To The Jury

Ling Nan Zheng v. Liberty Apparel Co. Inc.

Plaintiffs-appellees were 25 Chinese garment workers living and working in New York City’s Chinatown. In 1999, they sued Liberty Apparel Company and its principals Albert Nigri and Hagai Laniado (collectively, “the Liberty Defendants”), and others, for violations of the Fair Labor Standards Act (“FLSA”), and the New York Labor Law (“NYLL”). After a lengthy procedural history, the case went to a jury trial, and the principal issue was whether the Liberty Defendants were plaintiffs’ “joint employer” for purposes of the FLSA and New York state law claims.

The Liberty Defendants appealed that judgment.  In this opinion, the Second Circuit considered Defendants’ contention that the district court-rather than the jury-should have determined whether the Liberty Defendants were plaintiffs’ joint employer.  And on that issue, they affirmed.  The substantive law regarding the joint employment issue was discussed in a separate opinion.

After a lengthy procedural history, the defendants removed for summary judgment, and on May 23, 2008, Judge Sullivan denied that motion. Zheng v. Liberty Apparel Co., 556 F.Supp.2d 284, 287 (S.D.N.Y.2008) (“Zheng III ”). The court determined that, while there was no genuine issue of fact that the first, second, and fourth Zheng II factors weighed in the Liberty Defendants’ favor, there was a dispute of fact regarding factors three, five, and six. Id. at 289-95. On February 11, 2009, after a two-and-a-half week trial, the jury found in plaintiffs’ favor. The court denied the Liberty Defendants’ post-verdict motions to set aside the verdict and for a new trial. By final judgment entered October 26, 2009, plaintiffs were awarded $556,566.76 in damages.

Discussing the issues on this appeal, the Court framed them as: Whether “(1) the district court improperly allowed the jury to determine the “ultimate legal question” whether the Liberty Defendants were plaintiffs’ joint employer, whereas instead the court itself should have resolved that issue; (2) the district court refused to charge the jury that, as a matter of law, three of the six Zheng II factors weighed in the Liberty Defendants’ favor (to some degree); and (3) as a matter of law, plaintiffs’ evidence was insufficient to support the jury’s finding of joint employment. As to the § 345-a(1) claim, the Liberty Defendants argue that (1) the statute does not authorize a private right of action, and, alternatively, (2) whether it authorizes a private right of action raises a novel and complex issue of state law such that the district court should have declined to exercise supplemental jurisdiction over that claim, see 28 U.S.C. § 1367(c)(1).”

Holding that the Court below had correctly submitted the issue of joint-employment to the jury, the Court reasoned:

“In the context of a jury trial, the question whether a defendant is a plaintiffs’ joint employer is a mixed question of law and fact. Such questions “involve[ ] the application of a legal standard to a particular set of facts.”   Richardson v. N.Y. State Dep’t of Corr. Serv., 180 F.3d 426, 437 (2d Cir.1999) (internal quotation marks omitted). “FLSA claims typically involve complex mixed questions of fact and law….” Barrentine v. Arkansas-Best Freight Sys., 450 U.S. 728, 743 (1981); cf. Holzapfel v. Town of Newburgh, N.Y., 145 F.3d 516, 521 (2d Cir.1998).

The jury’s role was to apply the facts bearing on the multi-factor joint employment inquiry to the legal definition of joint employer, as that term had been (properly) defined by the district court in the jury charge. “[M]ixed questions [of law and fact] are ‘especially well-suited for jury determination….’ “ Richardson, 180 F.3d at 437 (quoting Mendell v. Greenberg, 927 F.2d 667, 673 (2d Cir.1990)); see also Kirsch v. Fleet St., Ltd., 148 F.3d 149, 171 (2d Cir.1998); Simms v. Vill. of Albion, N.Y., 115 F.3d 1098, 1110 (2d Cir.1997) (“A mixed question of fact and law may be submitted to the jury only if the jury is instructed as to the applicable legal standards.”).

In the Liberty Defendants’ view, the district court should have provided a special verdict form so that the jury could detail its factual findings regarding the various joint employment factors, and so that the district court could then have applied those findings to make the final determination as to joint employment. But such a rule would distort the jury’s proper role, described above, of applying law to fact. Moreover, requiring the use of a special verdict form would be anomalous in the law, cf. Fed.R.Civ.P. 49(a); Kirsch, 148 F.3d at 171; 9B C. Wright & A. Miller, Federal Practice & Procedure § 2505 (“Wright & Miller”); and appellate courts rarely-if ever-vacate for failure to use a special verdict form, see Skidmore v. Balt. & O.R. Co., 167 F.2d 54, 67 (2d Cir.1948) (“[W]e cannot hold that a district judge errs when, as here, for any reason or no reason whatever, he refuses to demand a special verdict, although we deem such verdict usually preferable to the opaque general verdict.”); Wright & Miller § 2505 (“[A]s numerous courts have held, as evidenced by the many cases cited in the note below, the exercise of th[e trial court’s discretion in using a general rather than a special verdict form] is not likely to be overturned on appeal.”).

The Liberty Defendants’ reliance on language from Zheng II is misplaced. That decision recognized that the joint employment question is a mixed one of law and fact: “Finally, there is the conclusion of law to be drawn from applying the factors, i.e., whether an entity is a joint employer.”   Zheng II, 355 F.3d at 76 (emphasis added); cf. id. at 76 n.13 (noting “[t]he fact-intensive character of the joint employment inquiry”). Moreover, to the extent Zheng II contemplated de novo review of a joint employment determination, it did so only in the context of summary judgment, not a jury trial. De novo review of a jury’s joint employment determination would necessitate use of a special verdict-which, as we explained above, we do not require-and would cause the appellate court to tease apart the interwoven elements of facts and law, a project that would raise serious Seventh Amendment concerns, cf. Castillo v. Givens, 704 F.2d 181, 199 (5th Cir.1983) (Higginbotham, J., concurring)-if it could even be done.

For the foregoing reasons, we hold that the district court properly submitted the joint employment issue to the jury. The judgment of the district court is affirmed, subject to the partial vacatur and remand required by the companion summary order. The mandate shall issue forthwith.”

2d. Cir.: Pharmaceutical Reps Are Neither Outside Sales Nor Administrative Exempt

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.

2d. Cir.: Advertising Salespeople Are Not Administratively Exempt Under The FLSA; Sales Are Not “Directly Related To Management Policies Or General Business Operations”

Reiseck v. Universal Communications of Miami, Inc.

This case was before the Court on Plaintiff’s appeal an Order at the district court below, granting Defendants summary judgment on all counts of Plaintiff’s claim.  The Court affirmed all parts of the judgment below, except for that pertaining to the FLSA.  Resolving a question of first impression, the Court held that advertising salespeople, who conduct sales with individual customers are not subject to the administrative exemption as a matter of law, because such sales work is production work not administrative.

The Court discussed the following facts as relevant to its decision:

“September 2002, Reiseck began working as a Regional Director of Sales at Universal in New York City. As Regional Director of Sales, Reiseck was responsible for generating advertising sales in the northeastern United States and Canada from the travel and finance sectors for Universal’s magazine publication, Elite Traveler. While an employee of Universal, Reiseck was paid a base salary plus certain commissions. Plaintiff was paid no overtime during her tenure with Universal.

Elite Traveler is distributed on a complimentary basis. Advertising sales therefore constitute the majority of Universal’s revenue from Elite Traveler. The magazine had a sales staff, a marketing staff, and an editorial staff. The sales staff sold advertising space; the marketing staff created promotional material to increase advertising sales; and the editorial staff produced the “content” of the magazine.”

Discussing the inapplicability of the administrative exemption to the case at bar, the Court applied the s0-called pre-2004 “short test.”

“Under the short test as it applies here, an employee falls under the administrative employee exemption if the employee is paid on a salary or fee basis at a rate of not less than $250 per week (i.e., the “salary test”), id. § 541.2(e)(2), and the employee’s “primary duty consists of … the performance of office or nonmanual work directly related to management policies or general business operations of his employer,” id. § 541.2(a), and requires “the exercise of discretion and independent judgment,” id. § 541.2(e)(2), (i.e., the “duties test”). As noted above, there is no dispute that Reiseck’s employment satisfies the salary test prong of the short test.

Because the first prong of the short test is not in dispute, we move to the second prong-the duties test. Here, it is uncontested that Reiseck’s primary duty consisted of “the performance of office or non-manual work”; therefore we must consider whether Reiseck’s primary duty was “directly related to management policies or general business operations” of Universal. Id. § 541.2(a).

The phrase “directly related to management policies or general business operations” is not self-defining, and the Secretary of Labor has promulgated interpretive regulations to aid our application of this test. See, e.g., id. § 541.2. Although the Secretary’s legislative regulations-those promulgated pursuant to an express grant of authority by Congress, like 29 C.F.R. § 541.2-have the power to control courts’ reading of the law, the Secretary’s interpretive regulations have only the power to persuade courts. See Skidmore v. Swift & Co., 323 U.S. 134, 139-40 (1944). See generally United States v. Mead Corp., 533 U .S. 218 (2001). And thus we defer to the Secretary’s interpretative regulations only to the extent that we find them persuasive. See Skidmore, 323 U.S. at 140.

In its interpretive regulations, the Department of Labor describes “directly related to management policies or general business operations” in several ways. First, the interpretive rules state that the phrase at issue “describes those types activities relating to the administrative operations of a business as distinguished from ‘production’ or, in a retail or service establishment, ‘sales’ work.” 29 C.F.R. § 541.205(a). They also state that “the phrase limits the exemption to persons who perform work of substantial importance to the management or operation of the business.” Id. Alternatively, the interpretive rules state that the administrative operations include “advising the management, planning, negotiating, representing the company, purchasing, promoting sales, and business research and control.” Id. § 541.205(b).

At first glance, the two definitions of the phrase “directly related to management policies or general business operations” in the interpretive regulations seem to point to contradictory conclusions in Reiseck’s case. On the one hand, plaintiff was a salesperson responsible for selling specific advertising space, and so seems to fit comfortably on the “sales” side of the administrative/sales divide. See id. § 541.205(a). On the other hand, Reiseck also “promoted sales” in some sense, and thus seems to have performed administrative operations. See id. § 541.205(b). We are required to resolve this apparent contradiction. Whether advertising salespersons are administrative employees for the purposes of the exemptions to the FLSA’s overtime pay provisions is a question of first impression for this Court. In answering this question, we also refine our interpretation of the administrative exemption to the FLSA.

First, we consider the Department’s distinction between “administrative” and “sales.” As a magazine publisher, Universal is not one of the archetypal businesses envisaged by the FLSA; it is neither a manufacturer nor a retailer. Accordingly, placing Reiseck’s work into either the administrative or sales category is difficult initially. Nevertheless, a careful consideration of Universal’s business model provides some clarity. Because Universal does not charge readers for Elite Traveler, advertising sales are a critical source of revenue for Universal. One could thus conclude that advertising space is Universal’s “product.” If advertising space is Universal’s product and Reiseck’s primary duty was the sale of that product, then she may reasonably be considered a sales employee, rather than an administrative employee.

Next, we consider the contradictory conclusion suggested by the second description found in the interpretive regulations-namely, that administrative operations include “promoting sales.” 29 C.F.R. § 541.205(b). Because Reiseck sold advertising space, it seems that she must have “promoted sales.” But under that theory, any sales clerk in a retail store would “promote sales” when assisting potential customers, and there would be no administrative/sales distinction in a retail store despite the clear assertion of the interpretive rule that sales work in a retail store is not administrative work for the purposes of the FLSA. Id. One of our sister circuits has provided some helpful guidance on this matter. In Martin v. Cooper Electric Supply Co., 940 F.2d 896, 905 (3d Cir.1991), the Third Circuit reasoned that sales promotion “consists of marketing activity aimed at promoting (i.e., increasing, developing, facilitating, and/or maintaining) customer sales generally.” According to the logic of the Third Circuit, which we now adopt, an employee making specific sales to individual customers is a salesperson for the purposes of the FLSA, while an employee encouraging an increase in sales generally among all customers is an administrative employee for the purposes of the FLSA. Consider a clothing store. The individual who assists customers in finding their size of clothing or who completes the transaction at the cash register is a salesperson under the FLSA, while the individual who designs advertisements for the store or decides when to reduce prices to attract customers is an administrative employee for the purposes of the FLSA.

Here, Reiseck is plainly a salesperson. Although she did “develop new clients” with the goal of increasing sales generally, this was not her primary duty. Under the interpretive regulations, an employee’s “primary duty” is the duty that consumes a “major part, or over [fifty] percent, of the employee’s time.” 29 C.F.R. § 541.103 (defining “primary duty” for the executive employee); see also 29 C.F.R. § 541.206 (applying the definition of “primary duty” for the executive employee to the administrative employee). The record shows that Reiseck’s primary duty was to sell specific advertising space to clients. Even Gollan, plaintiff’s supervisor, conceded that Reiseck was a member of the “sales staff” and not the “marketing staff.”  Because Reiseck’s primary duty was the sale of advertising space, she is properly considered a “salesperson” for the purposes of the FLSA and therefore does not fall under the administrative exemption to the overtime pay provisions of the FLSA.

Recent amendments to the interpretive regulations provide helpful guidance to support our conclusion above. Although these interpretive regulations do not apply retroactively, see ante note 5, (and even if they did apply retroactively, we need not consider them if we find them unpersuasive, see Skidmore, 323 U.S. at 140), we nevertheless note that the new regulations reach the same conclusion that we reach above. When providing examples of employees who fall under the administrative exemption, the interpretative regulations state that an employee in the financial sector whose primary duty includes “marketing, servicing, or promoting the employer’s financial products” likely falls under the administrative exemption. 29 C.F.R. § 541.203(b) (2004). But, the regulations then specify that “an employee whose primary duty is selling financial products does not qualify for the administrative exemption.” Id. (emphasis added). For example, if a bank employee, acting within the scope of her primary duty, encourages a customer to open a money market account while she opens a checking account for that customer, she would not likely be an administrative employee because she simply was selling a financial product. If, however, an employee’s primary duty included deciding which interest rates to offer to encourage customers to open money market accounts, then that employee would likely be considered an administrative employee, because she was “marketing … or promoting” the financial products. Universal’s sale of advertising space is similar to a financial services company’s sale of financial products. Neither fits neatly within the traditional retail sales model, yet both are standard products sold directly to clients. Additionally, the new interpretative regulations confirm t

Because Reiseck’s primary duty is not administrative, she cannot fall under the administrative exemption to the overtime pay provisions of the FLSA. Our inquiry ends there-we need not inquire whether her work requires “the exercise of discretion and independent judgment,” because the short test requires both that the employee’s primary duty be administrative and that the employee’s work involves the use of discretion. 29 C.F.R. § 541.2(e)(2).”

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