The 7th Circuit recently handed down a decision that could drastically impact the $300 billion global pharmaceutical industry.

A unanimous three-judge panel ruled May 8 in the consolidated cases Schaefer-LaRose v. Eli Lilly & Co. and Jirak v. Abbott Laboratories Inc. that sales representatives at Eli Lilly and Abbott, which are among the top U.S.-based pharmaceutical companies, are not entitled to overtime pay under the Fair Labor Standards Act (FLSA).

In general, the FLSA requires that employees receive overtime pay if they work more than 40 hours a week. But there are several exemptions to this rule. For decades, pharmaceutical companies have placed their sales reps under two such exemptions: the outside sales exemption, which stipulates that autonomous sales reps can't receive overtime pay; and the administrative exemption, which states that salaried employees who perform nonmanual work related to a company's central business operations, and who exercise their own discretion and independent judgment with respect to significant matters, can't receive overtime pay.

As the pharmaceutical industry continues to swell, sales reps are becoming annoyed that they put in extra hours without extra compensation.

“The plaintiffs bar has seen an opportunity because the industry doesn't fit squarely within the traditional framework of the FLSA,” says Emily Burkhardt Vicente, a partner at Hunton & Williams.

When Congress enacted the FLSA in 1938, it didn't foresee the business model under which the pharmaceutical industry now operates. Within this highly regulated sector, sales reps can't consummate actual sales. Rather, they meet with doctors to advocate their companies' drugs, and doctors prescribe the drugs to their patients, who purchase the drugs at pharmacies.

The Department of Labor (DOL) recently has submitted amicus briefs in various cases, including the cases consolidated before the 7th Circuit, asking courts to classify pharmaceutical sales reps as nonexempt under the FLSA. But the 7th Circuit ignored the agency's position and said the sales reps in these consolidated cases fall under the FLSA's administrative exemption.

Not Mouthpieces

The court considered two prongs of the administrative exemption: whether the sales reps perform work that is directly related to their employers' business operations, and whether they exercise discretion and independent judgment.

As for the first prong, “the plaintiffs argued that the exemption only applies to high-level employees whose work targets the companies' overall sales promotion and marketing efforts,” Burkhardt Vicente explains. “But the court said the reps' jobs simply have to support the core business of the companies. It found the core business of the companies is the development and production of pharmaceuticals, and the reps' promotion work supports that.”

As for the second prong, “the court recognized that even though the sales reps have to operate within a highly regulated environment, that doesn't mean that they can't still exercise significant independent judgment,” Burkhardt Vicente says.

Judge Kenneth Ripple wrote that the reps “aren't “simple mouthpieces, reciting scripts.”

“The reps are able to exercise judgment about exactly what information to put forward. It's up to them to decide how to use their sample allowances as well,” says Winston & Strawn Partner Michael Roche.

Thus, the 7th Circuit determined that the administrative exemption applied. Notably, the court declined to comment on whether the outside sales exemption applied because of a Supreme Court case that was pending at the time.

Deciding Deference

In April, the Supreme Court heard arguments for Christopher v. SmithKlineBeecham Corp. d/b/a GlaxoSmithKline, a case centering on whether pharmaceutical sales reps qualify for the outside sales exemption. At press time, the high court had not yet reached a decision (see “Argument Analysis”).

Roche says that if the Supreme Court holds that the outside sales exemption applies, then most employers will probably classify them that way, and the 7th Circuit decision probably won't be all that significant.

On the other hand, if the Supreme Court holds that the outside sales exemption does not apply, the 7th Circuit decision will give hope to employers that sales reps can still be found exempt under the administrative exemption.

Lee Schreter, co-chair of the wage and hour practice at Littler Mendelson, offers a possible worst-case scenario. “If the Supreme Court rules that sales reps in this case are not exempt outside salespersons and the other exemptions also are rejected, this could have a dramatic financial impact on pharma companies,” she says. “Not only could they be required to issue back pay to 90,000 sales reps, potentially costing billions, but the continuing costs to pay overtime could change the structure of the industry.”

The high court also will consider in Christopher how much deference courts must give to the DOL in amicus briefs. Schaefer-LaRose/Jirak is one of two decisions this year in which the 7th Circuit has rejected the DOL's litigation position (the other was Sandifer v. U.S. Steel Corp., also decided on May 8).

“The court said the DOL wasn't entitled to deference primarily because its position seems to change depending on who is in power in the administration,” Burkhardt Vincente says.

Experts say if the Supreme Court rules in Christopher that courts must defer to the DOL, the agency will be more likely to intervene in future cases.