Christopher v. Smithkline Beecham Corp.
SUPREME COURT REJECTS DEPARTMENT OF LABOR’S BROAD INTERPRETATION OF THE FAIR LABOR STANDARDS ACT:
Retrenchment from Liberal Construction?

By Alexander T. Linzer

On June 18, 2012, in Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156 (2012), a five-justice conservative majority of the Supreme Court rejected a broad interpretation of the Fair Labor Standards Act (“FLSA”) proffered by the Department of Labor, holding that pharmaceutical representatives who call on doctors to encourage them to prescribe the company’s drugs are “outside salesmen”, even though they do not actually make any sales, and therefore fall beyond the ambit of the FLSA and are not entitled to overtime pay.

The SmithKline case is one of the few times in over seven decades the Supreme Court has ruled in favor of an employer under the FLSA, which is a New Deal law passed to protect workers. Time and future cases will tell whether SmithKline represents a fundamental shift in the Supreme Court’s approach to the FLSA, or a one-off pull back from the otherwise longstanding liberal construction of the law.

I. The FLSA

In 1938, President Franklin D. Roosevelt declared at the signing ceremony for the FLSA that it was "the most far-reaching, far-sighted program for the benefit of workers ever adopted in this or any other country."

Among other worker protections, the FLSA requires employers to pay employees time and a half for every hour over 40 worked in a week. However, the FLSA exempts certain categories of employees from its coverage, such as "executives", "administrative employees", and "professionals." 29 U.S.C. § 213. If an employee falls within one of the exempted classifications, the employer need not pay him overtime or otherwise follow the mandates of the FLSA.

II. The SmithKline Beecham Decision

The SmithKline Beecham decision considered the FLSA's "outside salesmen" exemption. 29 U.S.C. § 213(a)(1). The Petitioners were pharmaceutical sales representatives called "detailers." Their primary duty was to visit doctors and obtain nonbinding commitments from them to prescribe SmithKline drugs to patients. SmithKline argued that the detailers, who earned on average more than $70,000 per year, were exempt from the FLSA as "outside salesmen", and therefore not entitled to overtime pay at time and a half.

The District Court ruled in favor of SmithKline, holding the detailers “exempt”; the Ninth Circuit affirmed. See Christopher v. SmithKlein Beecham Corp., 2010 WL 396300 (D. Ariz. 2010); SmithKline Beecham Corp., 635 F.3d 383 (9th Cir. 2011). Significantly, these lower SmithKline court decisions were at odds with both a Department of Labor opinion set forth in an amicus brief, and a decision of the Second Circuit deferring to that Department of Labor’s opinion that pharmaceutical representatives were not exempt from the FLSA. See In re Novartis Wage and Hour Litigation, 611 F.3d 141 (2nd Cir. 2010). The Labor Department and the Second Circuit reasoned that pharmaceutical sales representatives were not "outside salesmen" because they did not make sales or obtain orders: "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," and is therefore not exempt from FLSA overtime requirements. Novartis, 611 F.3d at 153-154; see also Gorey v. Manheim Services Corp., 788 F. Supp. 2d 200 (S.D.N.Y. 2011) (employees of auto auction company that traveled to auto dealers to obtain non-binding commitments from them to attend auto auctions and buy and sell cars were not "outside salesmen" because they do not obtain a commitment to buy, and were therefore entitled to overtime under the FLSA).

Resolving this split in the circuits, the conservative majority on the Court (Justices Roberts, Kennedy, Scalia, Thomas, and Alito), Justice Alito writing, held the detailers to be exempt employees, and therefore not protected by the FLSA’s overtime payment requirement.

The Supreme Court had previously ruled that the employer bore the burden of establishing an exemption. Idaho Sheet Metal Works, Inc. v. Wirtz, 383 U.S. 190 (1966). Moreover, in a unanimous decision authored by Justice Scalia, it had also previously held that exemptions under FLSA are to be narrowly construed against employers, and withheld except as to persons plainly and unmistakably within their terms and spirit. Auer v. Robbins, 519 U.S. 452, 462-463 (1997). The Auer Court also held that courts should give deference to Labor Department interpretations advanced in a legal brief. Id. at 461-462.

Despite these previous decisions grounding a broad reading of the FLSA’s scope, the majority held for employer SmithKline, ruling it had carried its burden, and that Auer deference was unwarranted because, among other things, the DOL regulations relevant to defining "outside salesman" were "ambiguous" and imposed potentially massive liability for conduct that occurred before the DOL’s interpretation was announced. Enforcing it would therefore "seriously undermine the principle that agencies should provide regulated parties 'fair warning of the conduct [a regulation] prohibits or requires.'" 132 S. Ct. at 2167, quoting Gates & Fox Co. v. Occupational Safety and Health Review Comm’n, 790 F.2d 154, 156 (D.C. Cir. 1986)(Scalia J.). The Court majority also put forth an estoppel rationale, reasoning that Auer deference was unwarranted because

"despite the industry’s decades long practice of classifying pharmaceutical detailers as exempt employees, the DOL never initiated any enforcement actions with respect to detailers or otherwise suggested that it thought the industry was acting unlawfully. . . . Other than acquiescence, no explanation for the DOL’s inaction is plausible."

Id. at 2168. Ruling that Auer deference was unwarranted, the Court instead decided to "accord the Department's interpretation a measure of deference proportional to the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it the power to persuade." Id. at 2168-2169 (internal quotations omitted).

Addressing the statutory interpretation issue without deferring to the DOL, the majority found that detailers were "outside salesmen" exempt from FLSA overtime requirements. The Court reasoned that the FLSA exempted anyone "employed in the capacity of [an] outside salesman", 29 U.S.C. § 213(a)(1), and that the statute’s emphasis on "capacity" counsels in favor of a functional, rather than a formal, inquiry. Id. at 2170. The majority also relied on the DOL’s regulations, which define an "outside salesman" as an employee whose primary duty is "making sales," adopting the statutory definition of "sale". Id. at 2170-1. Pursuant to 29 U.S.C. § 203(k), "sale" or "sell" "includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition." According to the majority, the statute’s use of the words "includes," "any," and "other disposition," signaled Congress’ intent to define "sale" in a broad manner and to include transactions that might not be considered sales in the technical sense. Id. at 2171. The Court concluded:

"[o]btaining a nonbinding commitment from a physician to prescribe one of respondent’s drugs is the most that petitioners were able to do to ensure the eventual disposition of the products that respondent sells. This kind of arrangement, in the unique regulatory environment within which pharmaceutical companies must operate, comfortably falls within the catch-all of 'other disposition.'"

Id. at 2171. Justice Breyer dissented for the Court’s liberal wing, joined by Justices Ginsburg, Sotomayor, and Kagan. Id. at 2175. Justice Breyer actually agreed with the majority that the DOL’s interpretation of its FLSA regulations should not be given deference. Id. However, agreeing with the DOL and the Second Circuit, Justice Breyer argued that a drug detailer was not an "outside salesman" because he does not actually sell the product, but instead gets a “non-binding commitment", and does not otherwise fall under an exemption. Id. at 2177-2179.

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