Argument recap: Has the Department of Labor’s seventy-year silence doomed its position?

At Monday’s argument in Christopher v. SmithKline Beecham Corp., it appeared that the Justices may have been receptive to the idea that pharmaceutical sales representatives (PSRs) fall under the “outside salesman” exemption to the Fair Labor Standards Act (FLSA) and thus are not entitled to overtime pay. At the same time, however, they sought to reconcile the pharmaceutical company’s construction of the statute with their skepticism about whether the PSRs themselves actually make sales.

Arguing for the petitioners was Thomas C. Goldstein. Almost immediately, the Court latched onto the “consignment for sale” clause of Section 203(k)’s definition of “sale.” Justice Alito inquired whether under a consignment the consignor actually transfers title to the property being consigned. Mr. Goldstein acknowledged that there is not a transfer of title under a consignment; instead, it is an agreement for the transfer of title. Justice Scalia, by contrast, did not even agree that a consignment is an agreement for the transfer of title. Instead, he regarded a consignment as merely a “future contingency”:  if someone wants to buy the item, the consignee will sell it. This initial discussion suggested that the Court may be receptive to the idea (contrary to the petitioners’ contention) that a transfer of title is not required to meet the FLSA’s definition of “sale.”  Justice Ginsburg focused on the fact that PSRs work autonomously with minimal supervision. She also pointed out that much of a PSR’s work occurs off hours in an entertainment role, such as by taking physicians out to dinner and to play golf. Mr. Goldstein countered that PSRs must comply with pharmaceutical sales regulations that prohibit certain activities, and which actually mean that PSRs do not have as much autonomy as one might think.

Justice Scalia then switched to a discussion of whether a commitment for a physician to prescribe a certain drug is equivalent to a sale. Mr. Goldstein responded that it was not; at most, the commitment is “precatory” and cannot be legally binding. Arguing for the United States as an amicus in support of the petitioners was Deputy Solicitor General Malcolm L. Stewart. Like the petitioners, Mr. Stewart argued that the “outside salesman” exemption requires a transfer of title to qualify as a “sale” under the FLSA’s definition. And, again, Justice Scalia pointed out that the definition of “sale” under the FLSA includes a consignment as an example, which does not involve a transfer of title. The Court’s most pressing concern, however, appeared to be the fact that the Department of Labor had not, for at least seventy years, taken the position that PSRs fall outside the “outside salesman” exemption:  the Department of Labor only recently began filing amicus briefs on this question.  And several Justices expressed the related concern that the Department of Labor has begun taking this position through amicus briefs, rather than notice-and-comment rulemaking.

Arguing on behalf of SmithKline Beecham, Paul D. Clement began by setting forth a laundry list of how PSRs perform the same functions as traditional salespeople. However, Chief Justice Roberts pithily noted that “they don’t do sales.” “Your long list sort of stopped one step short. They don’t make sales.”

Mr. Clement disagreed, arguing that PSRs “make sales in some sense.” Justice Sotomayor expressed concern that if the standard should be making sales “in some sense,” then practically everyone involved in promotional work could be classified as exempt because most promotional jobs involve activities that make sales “in some sense.” Mr. Clement tried to allay her concerns by pointing out that making sales must be the primary duty, rather than an incidental one.

The argument then shifted to a discussion of whether the commitment to prescribe is sufficient to satisfy the definition of “sale” under the FLSA. Justice Ginsburg pointed out that sales are actually made –by the pharmaceutical company to hospitals or wholesalers, not by the PSRs.

Justice Sotomayor thereafter brought up the issue of deference to an agency’s expertise. Why, she asked, should the court not defer to the Department of Labor’s interpretation of the statute as set forth in its amicus filings? Mr. Clement argued that the Department’s interpretation has been inconsistent with the statute.

Pivoting off of the Court’s earlier concern that the Department may have changed its position, Mr. Clement tried to emphasize that the Department should not change position without notice-and-comment rulemaking.  On this point, Justice Kagan responded that perhaps the pharmaceutical companies had been given “a gift” by the Department of Labor, which had declined to address the issue not on the ground that it regarded PSRs as outside salesmen, but because it had other, more urgent matters to address. But now that the issue has arisen, the Department has now decided to address it.

Another issue that arose throughout oral argument was the question of whether a ruling in petitioners’ favor would create retroactive liability for the pharmaceutical companies, which would suddenly have to calculate overtime payments for the past several years for the approximately 90,000 PSRs nationwide. Whether this economic argument carries any weight will remain to be seen.

Sam Wieczorek is an associate attorney with Fuchs & Roselli, Ltd, in Chicago. He graduated cum laude from Loyola University Chicago School of Law in 2007. His practice is concentrated in business law.

[Disclosure:  Tom Goldstein, the publisher of this blog, argued the case on behalf of the petitioners but was not involved in the drafting or editing of this post.]