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Legal Update

US Supreme Court Issues Opinion in Christopher v. Smithkline Beecham Corp.

18 June 2012
Mayer Brown Legal Update

The outside-sales exemption of the Fair Labor Standards Act (“FLSA”) provides that an individual who is employed “in the capacity of outside salesman” is not entitled to overtime pay. See 29 U.S.C. § 207(a)(1); 29 U.S.C. § 213(a)(1). The application of this exemption to pharmaceutical sales representatives (“PSRs”) has divided the courts of appeals, and spawned several interpretations by the Department of Labor via amicus briefs. On June 18, 2012, in Christopher v. Smithkline Beecham Corp., No. 11-204, the Supreme Court resolved this dispute in a 5-4 decision, holding that PSRs “qualify as outside salesmen under the most reasonable interpretation of the [Department of Labor]’s regulations.” Slip op. 25.

Although the specific result has particular significance for the pharmaceutical industry, the case could have broader significance for other regulated industries in that both the majority and dissenting opinions found, under the circumstances presented, that the agency’s interpretation of its own regulations was entitled to no deference, a conclusion that could limit the ability of agencies to adopt regulatory interpretations that impose unexpected liability on regulated entities.

Petitioners, plaintiffs below, were PSRs who worked between 50 and 60 hours per week, and claimed that they did not act “in the capacity of outside salesm[e]n” for the purposes of the FLSA, and that they were therefore entitled to overtime pay.

Although the Department of Labor (“DOL”) filed amicus briefs in support of petitioners in both the Ninth Circuit and the Supreme Court, the agency abandoned the position that it had taken in the Ninth Circuit and offered a different rationale for its ultimate conclusion in the Supreme Court. In the Supreme Court, the DOL argued that petitioners were entitled to overtime pay because “[a]n employee does not make a ‘sale’ for purposes of the ‘outside salesman’ exemption unless he actually transfers title to the property at issue,” slip op. 9, which is not something that PSRs do.

Significantly, the Court, in an opinion by Justice Alito, declined to defer to the DOL’s interpretation of the outside-sales exemption, stating that “[t]o defer to the agency’s interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties ‘fair warning of the conduct [a regulation] prohibits or requires.’” Slip op. 10-11. The Court further found that DOL’s interpretation of its own regulations were unpersuasive, concluding that the agency’s title-transfer theory “is flatly inconsistent with the FLSA” because the FLSA “defines ‘sale’ to mean, inter alia, a ‘consignment for sale,’” under which title would not be transferred. Id. at 15. The Court also rejected petitioners’ claim that they engaged in non-exempt promotional work, noting that “promotion work that is performed incidental to an employee’s own sales is exempt.” Id. at 16.

The Court then interpreted the text of the statute and accompanying regulations to determine if it supported an outside-sales exemption for PSRs. The Court concluded that the statute’s expansive definition of “sales,” which extends to a “consignment for sale” or “other disposition,” required a broad construction of the exemption which “accommodate[s] industry-by-industry variations in the methods of selling commodities.” Slip op. 19. The Court concluded that the “catchall phrase ‘other disposition’ is most reasonably interpreted as including those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity.” Id. With respect to the pharmaceutical industry, the Court held that what a PSR does—namely, obtain a non-binding commitment from a physician to prescribe certain drugs—“comfortably falls within the catchall category of ‘other disposition’” given “the unique regulatory environment within which pharmaceutical companies must operate.” Id. at 21. Further, the Court concluded that its determination “comports with the apparent purpose of the FLSA’s exemption for outside salesmen,” which was to exempt employees who “‘typically earned salaries well above the minimum wage’ and enjoyed other benefits that ‘se[t] them apart from the nonexempt workers entitled to overtime pay.’” Id.

The dissenting Justices, in an opinion by Justice Breyer, agreed that the DOL’s interpretation did not deserve deference, but reached a different conclusion than the majority as to the proper interpretation of the statute and its accompanying regulations. The dissenting Justices argued that PSRs engage in non-exempt promotional work, because it is ultimately a pharmacist, and not the PSR, who makes the sale of the product to the patient.

Authors

  • Andrew Tauber
    T +1 202 263 3324
  • Dan Himmelfarb
    T +1 202 263 3035

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