On July 6, 2010 the Second Circuit Court of Appeals ruled in In re Novartis Wage and Hour Litigation (“In re Novartis”)¹ that Novartis Pharmaceuticals Corporation’s pharmaceutical sales representatives (“Reps”) did not meet the requirements of the administrative or outside sales exemptions under the Fair Labor Standards Act (FLSA) and therefore were incorrectly classified as exempt employees. In so doing, the Second Circuit reversed a decision by the district court for the Southern District of New York and reached a conclusion contrary to that reached by the Third Circuit in the recent Smith v. Johnson & Johnson case.

In support of its decision, the Second Circuit found the following facts: In visits typically lasting no more than five minutes, the Reps provide physicians with information about the benefits of Novartis pharmaceuticals and encourage them to prescribe the products to their patients. Reps may give physicians reprints of clinical studies about the pharmaceuticals, identify the Novartis products for which insurers will pay, organize meals and programs to promote particular products, give physicians samples of drugs, and in many instances get physicians to say they will prescribe Novartis products in the future. Although physicians cannot purchase drugs directly from the manufacturer, the Reps seek verbal commitments from physicians to prescribe Novartis’s drugs to their patients.

When the case was considered by the district court, it dismissed the plaintiffs’ claims, finding the Reps were exempt employees under both the “outside sales” and “administrative” exemptions set forth in the FLSA. Analyzing first the outside sales exemption, the district court concluded that even though the Reps “may not ‘sell’” in a “technical[ ]” sense, they do “make sales in the sense that sales are made in the pharmaceutical industry” and therefore they meet the “spirit and the letter” of the outside sales exemption. The district court also found that the Reps meet the administrative exemption, because they “exercise discretion and independent judgment with respect to matters of significance” when they meet with physicians, provide them with information about the company’s products, and attempt to get commitments to prescribe the products. The Second Circuit reversed and held that the Reps do not meet either exemption.

Outside Sales Exemption

The Second Circuit concluded that the Novartis Reps do not meet the requirements of the outside sales exemption because they do not “make sales.” The court relied heavily on the Secretary of Labor’s amicus curiae position that a “sale” requires an exchange of consideration between buyer and seller and that, at best, Reps simply seek a positive affirmation from physicians that they will prescribe Novartis’s products in the future.

Although Novartis argued that the preamble to the regulations accompanying the FLSA provides that “commitments to buy” may constitute “making sales” under the exemption, the court rejected the argument as applied to this case. It held that “[t]he 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.”

Administrative Exemption

The plaintiffs also challenged the application of the administrative exemption based on the degree of discretion the Novartis Reps have in the performance of their duties. The Second Circuit again deferred to the Secretary of Labor’s interpretation of the regulations and her position regarding their application to the facts of the case. It noted that, despite the importance of the Reps’ efforts to promote the company’s products, there was “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.” Instead, the Second Circuit accepted the plaintiffs’ claim that they do “low-level discretionless marketing work, strictly controlled by Novartis” and concluded that they did not exercise sufficient discretion and independent judgment to satisfy the administrative exemption. 

This entry was written by Lori Alexander, Michael Harvey, and Theresa Waugh.

¹ On the same day the In re Novartis ruling was issued (July 6, 2010), the Second Circuit also issued a summary order in Kuzinski v. Schering Corp., 2d Cir. No. 09-1945-cv, affirming the district court’s denial of summary judgment in a similar case.