09-0437 | Omnilex

Texte intégral

09-0437-CV
In re Novartis
Wage and Hour
Litigation

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UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT

August Term, 2009
(Argued: February 19, 2010

Decided: July 6, 2010)

Docket No. 09-0437-CV

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In re NOVARTIS WAGE AND HOUR LITIGATION

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Before: KEARSE and HALL, Circuit Judges, RAKOFF, District Judge *.
Appeal from a judgment of the United States District
Court for the Southern District of New York, Paul A. Crotty,
Judge, dismissing claims of pharmaceutical company sales
representatives for overtime pay under the Fair Labor Standards
Act of 1938, 29 U.S.C. § 201 et seq., and state law, finding that
such representatives fell within exemptions for outside salesmen
and for administrative employees exercising discretion and
independent judgment. See 593 F. Supp.2d 637 (2009).

Vacated and remanded.

\* Honorable Jed S. Rakoff, of the United States District Court
for the Southern District of New York, sitting by designation.

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JEREMY HEISLER, New York, New York (David W.
Sanford, Katherine M. Kimpel, Sanford,
Wittels & Heisler, Washington, D.C., Steven
Wittels, Andrew Melzer, Sanford, Wittels &
Heisler, New York, New York, on the brief),
for Plaintiffs-Appellants.

RICHARD H. SCHNADIG, Chicago, Illinois (Vedder
Price, Chicago, Illinois, Jonathan A.
Wexler, Vedder Price, New York, New York,
on the brief) , for Defendant-Appellee.

JENNIFER R. MARION, United States Department of
Labor, Washington, D.C. (Carol A. De Deo,
Deputy Solicitor for National Operations,
William C. Lesser, Deputy Associate
Solicitor, Paul L. Frieden, Counsel for
Appellate Litigation, United States
Department of Labor, Washington, D.C., on
the brief) , for Amicus Curiae Secretary of
Labor in support of Plaintiffs-Appellants.

OUTTEN & GOLDEN, New York, New York (Justin M.
Swartz, Rachel Bien, Outten & Golden, New
York, New York, Catherine K. Ruckelshaus,
National Employment Law Project, New York,
New York, George A. Hanson, Bradley T.
Wilders, Stueve Siegel Hanson, Kansas City,
Missouri, Rebecca M. Hamburg, National
Employment Lawyers Association, San
Francisco, California, Richard J. (Rex)
Burch, Bruckner Burch, Houston, Texas, of
counsel) , filed a brief on behalf of Amicus
Curiae National Employment Lawyers
Association in support of Plaintiffs-
Appellants.

PAUL, HASTINGS, JANOFSKY & WALKER, Washington,
D.C. (Neal D. Mollen, Paul, Hastings,
Janofsky & Walker, Washington, D.C., Robin
S. Conrad, Shane B. Kawka, National Chamber
Litigation Center, Washington, D.C., of
counsel) , filed a brief on behalf of Amicus
Curiae Chamber of Commerce of the United
States of America in support of Defendant-
Appellee.

KEARSE, Circuit Judge:

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In these consolidated class actions, the plaintiffs,
current or former pharmaceutical sales representatives employed
by defendant Novartis Pharmaceuticals Corporation ( "Novartis") ,
appeal from a judgment of the United States District Court for the
Southern District of New York, Paul A. Crotty, Judge, denying
their claims under the Fair Labor Standards Act of 1938 ( "FLSA" or
the "Act"), 29 U.S. C. § 201 et seq., and state law, for overtime
pay with respect to time worked in excess of 40 hours per week.
The district court granted Novartis's motion for summary judgment
on the ground that plaintiffs are outside salesmen and/or
administrative employees who are exempted from the FLSA's overtime
pay requirements. On appeal, plaintiffs contend that the district
court did not properly apply the exemption standards set out in
regulations promulgated under the FLSA by the United States
Secretary of Labor (the "Secretary"), see 29 C. F.R. §§ 541.200-
541.204, 541.500-541.504. The Secretary, appearing as amicus
curiae, endorses that contention. For the reasons that follow, we
agree with plaintiffs and the Secretary; we thus vacate the
judgment of the district court.

# I. BACKGROUND

Novartis researches, manufactures, markets, and sells
pharmaceuticals. The plaintiffs are some 2,500 persons who were
employed by Novartis at various times between March 23, 2000, and

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April 7, 2007, as sales representatives ( "Reps") in California or
New York, and who are parties to class actions in the United
States District Courts for the Central District of California or
the Southern District of New York, respectively, along with Reps
employed by Novartis in other states during that period who have
opted to join these actions. The actions were consolidated in the
Southern District of New York by the Judicial Panel on
Multidistrict Litigation for coordinated pretrial proceedings
pursuant to 28 U.S.C. § 1407. Plaintiffs alleged principally that
under the FLSA and state law, they were entitled to overtime pay
at the rate of one and one-half times their normal compensation
for time worked in excess of 40 hours per week. The following
facts are not in dispute.

## 14 A. Novartis's Use of Pharmaceutical Sales Representatives

To market its pharmaceuticals, Novartis has a team of
"brand" managers who, cognizant of limitations imposed by the
United States Food and Drug Administration ("FDA"), devise
descriptions of the essential features of each Novartis drug.
Marketing managers assist in the production of written promotional
materials. Novartis has regional managers who are involved in
hiring, firing, and business planning decisions, including working
on marketing strategy with the marketing team. Reporting to the
regional managers are district managers who supervise the Reps.
Under federal regulations, Novartis is prohibited from
selling its prescription drugs directly to patients. Instead,

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Novartis typically sells its products to wholesalers, which sell
them to individual pharmacies. Physicians write prescriptions
that permit patients to purchase those products from pharmacies.
Novartis employs some 6,000 Reps nationwide and assigns them to
make what Novartis characterizes as "sales" calls on physicians.

Reps do not sell the Novartis products to physicians.
Although Novartis advertises openings for Reps as sales positions,
the Reps' duties do not include "the exchange of good [s] or
services, contracting to sell any good or service, consigning for
the sale of any good or service, or obtaining orders or contracts
for the use of facilities." (Plaintiffs' Rule 56.1 Statement of
Undisputed Material Facts in Support of Their Motion for Summary
Judgment [ 107; Defendant Novartis Pharmaceuticals Corporation's
Responses to Plaintiffs' Rule 56.1 Statement of Undisputed
Material Facts in Support of Their Motion for Summary Judgment
[ 107.) Rather, in visits typically lasting no longer than five
minutes, the Reps provide physicians with information about the
benefits of particular Novartis pharmaceuticals and encourage the
physicians to prescribe those products. Reps give physicians
reprints of clinical studies reporting findings about the Novartis

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products. Reps also inform doctors as to whether Novartis
products are among those for which insurers will pay, resulting in
little or no cost to patients. The Reps give the physicians
samples of drugs; these samples are not sold, and no money is
exchanged. Indeed, selling drug samples is a federal crime. See
21 U.S.C. §§ 353 (c) (1), 333 (b) (1) (B). The goal of the Reps is to

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get physicians to say they will prescribe Novartis products for
their patients.

To enable the Reps to reach that goal, Novartis puts them
through a training program for several weeks. The training is
extensive, ranging from instruction on the medical benefits of
each Novartis drug -- and the way in which Reps should present
favorable scientific studies -- to matters of technique as detailed
as how they should hold their pens when showing Novartis's written
material to physicians.

In the training program, a Rep is taught how to question
physicians to determine why they may be hesitant about prescribing
Novartis products and then to offer arguments to overcome their
reluctance. Novartis instructs the Reps on four "social styles"
that a given individual may have in interacting with others and
teaches the Reps how to tailor their presentations to a
physician's particular social style. Novartis has also hired
consultants to observe its most successful Reps and incorporate
their techniques into the training program.

Novartis sets the number of times per trimester a Rep must
call on each physician and how often specific drugs should be
promoted. For each product in each trimester, Novartis has a
principal marketing message -- its "core message" -- developed by the
Novartis brand managers, which Reps are instructed to convey to
physicians on each call. Novartis gives the Reps written
promotional materials developed by its brand and marketing
managers, including posters, brochures, and laminated cards, to

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use on sales calls. The Reps do not play any part in formulating
the core message or the written materials; nor do they play any
part in devising Novartis's advertising. During training, Reps
are required to engage in role-playing, using scripts to practice
delivering the core message and parrying objections from
physicians.

Although the Novartis training material encourages the
Reps to tailor their pitches to an individual physician, they are
not allowed to deviate from the core message. They are not
allowed to use any written materials other than those provided by
Novartis. One Rep testified that Reps were expected to act like
"robots" because of the limitations on what they could say during
sales calls. If a physician asks a Rep a medical question for
which Novartis has not prepared an answer, the Rep is required to
refer the doctor to Novartis's medical department.

The Reps report to their district managers by telephone at
least every week or two, and sometimes report or confer daily. In
addition, once or twice a month, the district managers accompany
the Reps on their visits to physicians. During these ride-alongs,
the managers observe the Reps' meetings and critique their
performance. Reps receive negative reviews if they deliver the
Novartis core message in a way that violates FDA-imposed
limitations or Novartis policies.

As the Reps do not make sales, they are trained to end
their meetings with physicians with a "closing" in which they may
ask, "Doctor, will you prescribe this product for your patients

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who suffer from [the appropriate medical conditions] ?" They may
also ask, "Doctor, do I have your commitment to prescribe it [?] "
One Novartis district manager described this type of colloquy as a
"persuasive sale" but acknowledged that there was no way to know
whether any physician actually followed through on such a
commitment. One Rep stated that a physician might answer
affirmatively just to get the Rep out the door.

As to physicians who refuse to entertain office visits
from Reps, Novartis instructs the Reps to use other techniques to
make contact, such as showing up at hospitals early in the morning
before medical rounds. Reps also organize meals and other
programs for physicians where speakers promote Novartis products.
For such programs, Novartis maintains a list of cooperating
doctors, from which Reps must book speakers. Reps manage the
budgets for these events, but do so within limits set by Novartis
managers; Novartis sets a minimum number of such events that it
expects each Rep to hold.

Novartis does not know how many prescriptions individual
physicians write for its products. It subscribes to several
services that provide it with information as to when prescriptions
for Novartis products are filled at pharmacies that report such
information to the services; this information identifies the
prescribing physicians. Because the data are gathered from
pharmacies, however, these reports represent only the number of
prescriptions the reporting pharmacies filled, not all the
prescriptions actually written. Further, because some 19,000

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pharmacies do not report sales to these services, Novartis has
data for only about 72% of all filled prescriptions. Novartis
extrapolates from the reported sales in order to estimate the
sales at non-reporting pharmacies, and it believes those estimates
generate a fairly accurate picture of how many prescriptions are
being filled at non-reporting pharmacies; however, the latter
prescriptions cannot be traced to particular physicians.

Notwithstanding the absence of actual information as to
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particular physicians, the Reps, whose base wages are at least
$455 a week, receive up to a quarter of their compensation as
bonuses based on their performance with physicians. Given the
limits of its ability to monitor physicians' actual prescriptions,
Novartis sets goals for the number of prescriptions it hopes to
have filled in a particular territory, and it pays a Rep a bonus
when the number of filled prescriptions attributable to physicians
in the Rep's territory exceeds the goal Novartis has set. Some
Novartis Reps earn more than $100,000 a year. In 2005, Novartis
Reps' total compensation averaged $91,539.

The FLSA provides that many employees must be paid one and
one-half times their regular rate of compensation for time worked
in excess of 40 hours a week, see 29 U.S.C. § 207 (a) (1), but
provides that certain categories of workers are excluded from this
requirement, see id. § 213. Novartis Reps are expected to be in
the field from 8 a.m. to 5 p.m. on work days; they eat lunch with
physicians or while driving to or from their physician visits; and

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they attend the mandatory dinner programs, which sometimes prevent
them from returning home before 9 or 10 p.m. Notwithstanding a
standard week of five such nine-hour days plus the occasional
evening work, Novartis does not give its Reps overtime pay. As is
the practice throughout the pharmaceuticals industry, Novartis
treats its Reps as exempt from the overtime pay requirement in the
FLSA, as well as from comparable state-law requirements.

## B. The Decision of the District Court

In the consolidated proceedings, Novartis moved for
summary judgment dismissing the complaints on the ground that
plaintiffs were "outside salesm[e]n" and/or "administrative"
employees, 29 U.S.C. § 213 (a) (1), and thus exempt from the
overtime pay provisions of FLSA and state labor laws. Novartis
also argued that those Reps who earned more than $100, 000 a year
were exempt under 29 C.F.R. § 541.601 (entitled "Highly
compensated employees"). Plaintiffs cross-moved for partial
summary judgment ruling that they are not in an exempt category.

Ruling that it need not determine whether any Reps were
exempt as highly compensated employees, the district court denied
plaintiffs' motion and granted Novartis's motion on the ground
that the "Reps are not entitled to overtime compensation because
they are exempt from coverage as outside salespersons under the
FLSA and state laws, and even if they are not outside
salespersons, they are administrative employees and are still

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exempt. " In re Novartis Wage & Hour Litigation, 593 F . Supp . 2d
637, 640 (S.D.N.Y. 2009) ( "Novartis I") .

With respect to the contention that the Reps were exempt
as outside sales employees, see 29 U.S.C. § 213 (a) (1) ; 29 C.F.R.
§ 541.500, the district court reasoned that the Reps met the
spirit and the letter of that exemption. It stated that excluding
Reps from the exemption merely because they may not "'sell'" in a
"technical []" sense, Novartis I, 593 F.Supp.2d at 649 (citing
Jewel Tea Co. v. Williams, 118 F. 2d 202 (10th Cir. 1941) ) , would
"ignore [] the Act's spirit, purpose, and goals." Novartis I, 593
F. Supp. 2d at 648. The court stated that

Jewel Tea teaches that outside salespersons are
exempt from the overtime requirement not because they
"sell," as that term is technically defined, but
rather because they (1) generate commissions for
themselves through their work and (2) work with
minimal supervision, making adherence to an
hours-based compensation scheme impractical.

Novartis I, 593 F.Supp.2d at 648-49 (emphasis added). The court
also found that Reps do make sales for Novartis ( "NPC"), stating
as follows :

Legally, Reps cannot sell NPC drugs directly to
physicians. . . . Further, physicians have an ethical
obligation to prescribe only drugs suitable for their
patients' medical needs, meaning that they cannot
make a binding commitment to a Rep to prescribe
certain NPC products. . . . Nevertheless, . . . the
physicians called upon by Reps ultimately control the
purchase of NPC products by writing prescriptions.
. . . [A]bsent a prescription from a doctor, the
patient end-users of NPC drugs are not able to obtain
those drugs. NPC spends in excess of $500 million
annually to have its Reps meet on a frequent and
repeat basis with these physicians to seek their
commitments to prescribe NPC products. In other
words, Reps make sales in the sense that sales are
made in the pharmaceutical industry.

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Id. at 650 (emphases added) .

Rejecting plaintiffs' contention that the Reps do not make
sales because sales of pharmaceuticals are made only by
manufacturers to wholesale distributors, then by distributors to
pharmacies, and finally by pharmacies to patients, the district
court stated that

[t]he Court cannot ignore reality. Distributors are
not the end-users of NPC's products. If physicians
did not prescribe NPC products, patients would be
unable to buy them and distributors would have no
incentive to make purchases from NPC. The purchase
cycle commences with a prescription from physicians,
who are therefore the appropriate target of the Reps'
sales efforts. When the physician writes a
prescription for the NPC product, then a sale can
take place.

Id.

With respect to the exemption for administrative
employees, see 29 U.S.C. § 213 (a) (1) ; 29 C.F.R. §§ 541.200,
541.202, the district court concluded that the Reps also fell
within that category, stating that they earn in excess of $455 a
week, "they engage in work that is directly related to the
management or general business operations of NPC and they exercise
discretion and independent judgment with respect to matters of
significance." Novartis I, 593 F. Supp.2d at 655. The district
court concluded that Reps are engaged in work related to the
management or general business operations of Novartis because Reps
are not engaged in the production of Novartis pharmaceuticals and
because the Reps are critical to dissemination of information
about Novartis products :

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Reps meet with physicians and provide them with
information about NPC drugs in an attempt to persuade
the physicians to write prescriptions for those
drugs. The Reps' success in obtaining prescriptions
is critical to NPC's business. The sizeable
incentive payments made to Reps for generating
prescriptions, as well as the more than $500 million
paid to the 6,000 Reps, buttress [] the conclusion
that obtaining prescriptions for its drugs is
critical to NPC's success. There is no other
rational explanation for the commitment of this level
of financial resources to NPC's sales effort.

Id. at 656. The court concluded that Reps exercise "discretion
and independent judgment with respect to matters of significance"
because

Reps are expected to use initiative to increase the
number of prescriptions written for their drugs --
oftentimes, this involves building a good rapport
with the physicians and their staffs. Within the
confines of the "core messages" created by NPC, Reps
must decide how best to present their information and
must determine what type of "close" is most
appropriate in a given situation. This, of course,
depends on how much time the physician will allow the
Rep, the physician's patient base and prescribing
history, and numerous other factors. Reps set their
daily call schedules and are expected to use their
entertainment budgets to host informational events
for the physicians on their target lists. In
carrying out these activities, they are quite
clearly attempting to increase prescriptions for
their drugs -- a matter of considerable significance
for NPC.

Id. at 657. The district court was unpersuaded that Novartis's
training and expectations rendered Reps "robots" or automatons who
did not exercise significant discretion:

These labels are not facts, but merely arguments
designed to avoid the overtime exemptions. They do
not begin to answer why or how a robot or an
automaton could or should earn an average salary of
$91, 500 per year. Nor do they explain why NPC would
employ 6,000 Reps at a cost in excess of half a
billion dollars per year. They are an attempt to
avoid the consequences of what Reps do every day --

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arranging to call on physicians and, after assessing
how much time is available for the call, choosing the
best possible approach to convince the physician to
prescribe NPC drugs the next time an appropriate
patient opportunity presents itself. NPC pays a good
salary and material incentives to encourage this
behavior. Reps are given drug samples, printed
materials, and core messages. They are dispatched to
the offices of physicians in an attempt to convince
those physicians to prescribe NPC products. It
defies logic to accept that, in such a situation,
Reps are expected to do nothing but chant slogans and
mouth platitudes. At the bare minimum, Reps must be
capable of tailoring their presentation to a given
timeframe -- deciding how best to convey the "core
message" in a manner that will have the desired
effect on the physician. Such a decision involves
making an independent judgment, free of direct
oversight, even if NPC has provided Reps with
guidelines for conveying certain information in a
certain manner. Thus, while the exact nature of the
discretion and independent judgment exercised by Reps
may be in dispute, . . . on the present facts, NPC's
Reps have discretion and exercise independent
judgment.

Id.

Accordingly, having found both the outside salesman and
administrative employee exemptions applicable, the district court
granted Novartis's motion for summary judgment dismissing
plaintiffs' claims under the FLSA. In addition, finding that the
New York overtime pay exemptions were defined and applied in the
same manner as those in the FLSA, see Novartis I, 593 F. Supp. 2d at
646, and that California law, although differing slightly in the
ways it defined the exemption, was "essentially the same as the
FLSA and New York law, " id. at 647, the court granted summary
judgment dismissing plaintiffs' state-law claims.

This appeal followed.

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## II. DISCUSSION

On appeal, the Reps contend principally that the district
court erred in concluding that they are outside sales employees,
given that the " [t]he undisputed evidence in this case shows that
the Reps do not obtain orders, form contracts, or engage in any
type of sale as that term is defined by the FLSA" (Plaintiffs'
brief on appeal at 46), and in concluding that Reps are
administrative employees given that " [t]hey lack discretion and
independent judgment within [the] meaning of the administrative
exemption" (id. at 63) . Novartis defends the district court's
conclusions, arguing that Reps make sales "in the only practical
sense applicable to the pharmaceuticals industry" (Novartis brief
on appeal at 27), and that, in so doing, the Reps exercise
discretion and independent judgment (see id. at 48-55) .

The Secretary of Labor, participating in this appeal as an
amicus curiae in support of the Reps, points out that Department
of Labor ( "DOL" or "Department") regulations promulgated under the
FLSA (a) provide, in pertinent part, that an "outside salesman" is
one who, inter alia, has the primary duty of "making sales, " and
(b) provide that an exempt "administrative" employee is one who,
inter alia, exercises discretion and independent judgment with
respect to matters of significance. The Secretary contends that
because the Reps do not make sales or obtain orders and do not
exercise discretion and independent judgment, they are not within
the "outside salesman" or the "administrative" employee

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categories that are exempted from the FLSA overtime pay
requirements. Novartis argues that the Secretary's
interpretations are contrary to the regulations themselves. The
United States Chamber of Commerce has filed a brief as amicus
curiae in support of Novartis, citing Gonzales v. Oregon, 546 U.S.
243, 257 (2006), and arguing that the Secretary's interpretations
are not entitled to deference, on the theory that the regulations
merely parrot the FLSA's language and that the Secretary is thus
interpreting only the words of Congress, not those of the
regulations.

For the reasons that follow, we conclude that the
Secretary's regulations define and delimit the terms used in the
statute; that under those regulations as interpreted by the
Secretary, the Reps are not outside salesmen or administrative
employees; and that the Secretary's interpretations are entitled
to "controlling" deference, Auer v. Robbins, 519 U.S. 452, 461
(1997) .

A. The FLSA's Overtime Pay Requirement

Congress enacted the FLSA in 1938 to combat "labor
conditions detrimental to the maintenance of the minimum standard
of living necessary for health, efficiency, and general well-being
of workers." FLSA § 2 (a), 29 U.S.C. § 202 (a) . Section 7 (a) (1) of
the FLSA provides, in pertinent part, that

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no employer shall employ any of his employees who in
any workweek . . . is employed in an enterprise
engaged in commerce or in the production of goods for
commerce, for a workweek longer than forty hours

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unless such employee receives compensation for his
employment in excess of the hours above specified at
a rate not less than one and one-half times the
regular rate at which he is employed.

29 U.S.C. § 207 (a) (1) (emphases added). To the extent pertinent
to this appeal, FLSA § 13 (a) (1) exempts from that overtime pay
requirement

any employee employed in a bona fide . . .
administrative
capacity
capacity of outside salesman (as such terms are
defined and delimited from time to time by
regulations of the Secretary [) ] .

29 U.S.C. § 213 (a) (1) (emphases added) . The FLSA definitions
section provides that

" [s]ale" or "sell" includes any sale, exchange,
contract to sell, consignment for sale, shipment for
sale, or other disposition.

FLSA § 3 (k), 29 U.S.C. § 203 (k) .

"The overtime requirements of the FLSA were meant to apply
financial pressure to 'spread employment to avoid the extra wage'
and to assure workers 'additional pay to compensate them for the
burden of a workweek beyond the hours fixed in the act. '" Davis
V. J.P. Morgan Chase & Co., 587 F. 3d 529, 535 (2d Cir. 2009)
(quoting Overnight Motor Transportation Co. v. Missel, 316 U.S.
572, 578 (1942), superseded by statute, Portal-to-Portal Pay Act
of 1947, ch. 52, 61 Stat. 84). Because the FLSA is a "remedial
law, " Reiseck v. Universal Communications of Miami, Inc., 591 F.3d
101, 104 (2d Cir. 2010), exemptions to the overtime pay
requirement are " 'narrowly construed against the employers seeking
to assert them and their application limited to those
establishments plainly and unmistakably within their terms and

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spirit.'" Bilyou v. Dutchess Beer Distributors, Inc., 300 F.3d
217, 222 (2d Cir. 2002) (quoting Arnold v. Ben Kanowsky, Inc., 361
U.S. 388, 392 (1960) ) . The burden of proving that employees fall
within such an exemption is on the employer. See, e.g., Bilyou v.
Dutchess Beer Distributors, Inc., 300 F.3d at 222.

We review de novo a district court's grant or denial of
summary judgment, viewing the record in the light most favorable
to the party against whom summary judgment is sought. See, e. g.,
Dillon v. Morano, 497 F.3d 247, 251 (2d Cir. 2007). Whether the
duties of a job qualify an employee for a FLSA exemption is a

question

law,

which we

review

novo.

See,

e.q.,

Icicle

Seafoods,

Inc.

Worthington,

475 U.S.

709,

714 (1986)

;

Zheng v.

Liberty

Apparel

Co.,

355 F.3d

61, 76 (2d

Cir.

2003) .

B. The "Outside Salesman" Exemption

Pursuant to her statutory mandate to "define[] and
delimit [] " the terms "outside salesman" and "administrative"
employee, 29 U.S.C. § 213 (a) (1), the Secretary has promulgated
several regulations. Regulations issued in 2004 provide, inter
alia, that "[a] job title alone is insufficient to establish the
exempt status of an employee, " 29 C.F.R. § 541.2; rather, that
status may be determined only on the basis of the employee's
"salary and duties," id. With respect to "outside salesman," the
regulations provide as follows :

(a) The term "employee employed in the capacity
of outside salesman" in section 13 (a) (1) of the Act
shall mean any employee :

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(1) Whose primary duty is:

(i) making sales within the
meaning of section 3 (k) of the
Act, or

(ii) obtaining orders or
contracts for services or for the
use of facilities for which a
consideration will be paid by the
client or customer; and

(2) Who is customarily and regularly
engaged away from the employer's place or
places of business in performing such
primary duty.

(b) . . . . In determining the primary duty of
an outside sales employee, work performed incidental
to and in conjunction with the employee's own outside
sales or solicitations, including incidental
deliveries and collections, shall be regarded as
exempt outside sales work. Other work that furthers
the employee's sales efforts also shall be regarded
as exempt work including, for example, writing sales
reports, updating or revising the employee's sales or
display catalogue, planning itineraries and attending
sales conferences.

Id. § 541.500 (emphases added). Elaborating on the meaning of
sales of commodities, as contrasted with sales of services or the
use of facilities, the regulations provide that

[s]ales within the meaning of section 3 (k) of the Act
include the transfer of title to tangible property,
and in certain cases, of tangible and valuable
evidences of intangible property. Section 3 (k) of
the Act states that "sale" or "sell" includes any
sale, exchange, contract to sell, consignment for
sale, shipment for sale, or other disposition.

29 C.F.R. § 541.501 (b) (emphasis added) .

The regulations go on to describe the circumstances in
which an employee's efforts to "promot [e] " a product constitute --
or do not constitute -- "sales" within the meaning of the
regulations :

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(a) Promotion work is one type of activity
often performed by persons who make sales, which may
or may not be exempt outside sales work, depending
upon the circumstances under which it is performed.
Promotional work that is actually performed
incidental to and in conjunction with an employee's
own outside sales or solicitations is exempt work.
On the other hand, promotional work that is
incidental to sales made, or to be made, by someone
else is not exempt outside sales work.

(b) A manufacturer's representative, for
example, may perform various types of promotional
activities such as putting up displays and posters,
removing damaged or spoiled stock from the merchant's
shelves or rearranging the merchandise. Such an
employee can be considered an exempt outside sales
employee if the employee's primary duty is making
sales or contracts. Promotion activities directed
toward consummation of the employee's own sales are
exempt. Promotional activities designed to
stimulate sales that will be made by someone else are
not exempt outside sales work.

Id. §§ 541.503 (a) - (b) (emphases added) .

As described in the preamble to the 2004 DOL regulations,
these rules had their origins in regulations adopted after DOL
hearings conducted in the 1940s (resulting in a 1940 "Stein
Report" and a 1949 "Weiss Report"), see Defining and Delimiting
the Exemptions for Executive, Administrative, Professional,
Outside Sales and Computer Employees, 69 Fed. Reg. 22122, 22124
(Apr. 23, 2004) ("2004 Final Rule" or "Final Rule"). The Final
Rule's preamble ( "Preamble") discussed whether an outside
employee's promotional activities qualify him as a "salesman" and
emphasized that no one could be considered a salesman within these
regulations unless he in some sense made a sale.

Addressing concerns expressed by such groups as the
Grocery Manufacturers Association, the National Association of

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Manufacturers, and the U.S. Chamber of Commerce for the emphasis
on an employee's "own" sales, given the technological advances
that enable a customer to place its own order directly with a
supplier, the DOL agreed that a determination of whether an
employee is exempt as an outside salesman "should not depend on
whether it is the sales employee or the customer who types the
order into a computer system and hits the return button." 2004
Final Rule at 22163. But while the Preamble stated that the DOL

"agree [d] that technological changes in how orders are taken and
processed should not preclude the [outside salesman] exemption for
employees who in some sense make the sales," id. at 22162, it
emphasized that

the Department does not intend to change any of the
essential elements required for the outside sales
exemption, including the requirement that the outside
sales employee's primary duty must be to make sales
or to obtain orders or contracts for services. An
employer cannot meet this requirement unless it
demonstrates objectively that the employee, in some
sense, has made sales. See 1940 Stein Report at 46
(outside sales exemption does not apply to an
employee "who does not in some sense make a sale")
(emphasis added). Extending the outside sales
exemption to include all promotion work, whether or
not connected to an employee's own sales, would
contradict this primary duty test.

2004 Final Rule at 22162 (first two emphases ours). The Preamble
also elaborated on the primary-duty standard:

Employees have a primary duty of making sales if

they

"obtain

commitment

buy"

from

the

customer

and

are

credited

with the

sale.

See

1949

Weiss

Report at

("In

borderline

cases

the

test is

whether the person is actually engaged

in activities

directed toward the consummation of

his

own

sales, at

least to the extent of obtaining a commitment to buy

from

the

person

whom he

selling.

If his

efforts are

directed

toward stimulating the

sales of

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his company generally rather than the consummation of
his own specific sales his activities are not
exempt ") .

2004 Final Rule at 22162-22163 (emphases ours) .

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We note that the distinction between obtaining commitments
to buy and promoting sales by other persons has been respected in
areas other than the pharmaceutical industry. See, e.g., Gregory
v. First Title of America, Inc., 555 F.3d 1300, 1309 (11th Cir.
2009) (employee who obtained commitments to buy her employer's
title insurance service and was credited with those sales, and all
of whose efforts were directed towards the consummation of her own
sales and not towards stimulating sales for the employer in
general, was an outside sales employee within the meaning of the
FLSA and the regulations) ; Clements v. Serco, Inc., 530 F.3d 1224,
1228 (10th Cir. 2008) (civilian military recruiters who did not
obtain commitments from recruits were not outside salesmen within
the meaning of, e.g., 29 C.F.R. § 541.504) ; Wirtz v. Keystone
Readers Service, Inc., 418 F.2d 249, 253, 260 (5th Cir. 1969)
("student salesmen" were not outside sales employees where their
promotional activities were incidental to sales made by others) .

We think it clear that the above regulations, defining the
term "sale" as involving a transfer of title, and defining and
delimiting the term "outside salesman" in connection with an
employee's efforts to promote the employer's products, do far more
than merely parrot the language of the FLSA. The Secretary's
interpretations of her regulations are thus entitled to
"controlling" deference unless those interpretations are " 'plainly

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erroneous or inconsistent with the regulation. '" Auer, 519 U.S.
at 461 (quoting Robertson v. Methow Valley Citizens Council, 490
U.S. 332, 359 (1989) (other internal quotation marks omitted) ) .

We find no such inconsistency and see no such error.

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Although Novartis contends that the position taken by the
Secretary as amicus on this appeal is contrary to the regulations,
we disagree. The basic premise of the regulations explaining who
may properly be considered an exempt "outside salesman" -- a term
for which the FLSA explicitly relies on the Secretary to
promulgate defining and delimiting regulations -- is that an
employee is not an outside salesman unless he does "in some sense
make the sales, " 2004 Final Rule at 22162. And although that
phrase (on which Novartis relies heavily (see, e.g., Novartis
brief on appeal at 12, 22, 25, 29)) does not appear in any of the
regulations that explicate the term "outside salesman," the
regulations quoted above make it clear that 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. The
position taken by the Secretary on this appeal is that when an
employee promotes to a physician a pharmaceutical that may
thereafter be purchased by a patient from a pharmacy if the
physician -- who cannot lawfully give a binding commitment to do
so -- prescribes it, the employee does not in any sense make the
sale. Thus, the interpretation of the regulations given by the
Secretary in her position as amicus on this appeal is entirely
consistent with the regulations.

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Nor can we conclude that the regulations constitute an
erroneous interpretation of the FLSA definition of "sale" to
"include [] any sale, exchange, contract to sell, consignment for
sale, shipment for sale, or other disposition, " 29 U.S.C.
§ 203 (k) . Although the phrase "other disposition" is a catch-all
that could have an expansive connotation, we see no error in the
regulations' requirement that any such "other disposition" be "in
some sense a sale." Such an ejusdem generis-type interpretation
is consistent with the interpretive canon that exemptions to
remedial statutes such as the FLSA are to be read narrowly, see
Arnold, 361 U.S. at 392; see generally A.H. Phillips, Inc. v.
Walling, 324 U.S. 490, 493 (1945), and is neither erroneous nor
unreasonable, see, e.q., Chevron U.S.A. Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837, 842-43 (1984). We
accordingly owe the Secretary's interpretation deference, and we
turn to the question of its applicability to the present cases.
There is no genuine dispute over the sales path generally
traversed by Novartis pharmaceuticals. As described in Part I.A.
above, Novartis sells its drugs to wholesalers; the wholesalers
then sell them to pharmacies; and the pharmacies ultimately sell
the drugs to patients who have prescriptions for them. The Reps
promote the drugs to the physicians; the Reps do not speak to the
wholesalers or to the pharmacies or to the patients.

Nor is there any dispute as to what occurs during the
Reps' "sales" calls on physicians. The meetings are brief --
generally less than five minutes -- and the physicians neither buy

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pharmaceuticals from the Reps nor commit to buying anything from
the Reps or from Novartis. The Reps may give physicians free
samples, but the Reps cannot transfer ownership of any quantity of
the drug in exchange for anything of value. The physician is of
course an essential step in the path that leads to the ultimate
sale of a Novartis product to an end user; a patient cannot
purchase the product from a pharmacy without a prescription, and
it is the physician who must be persuaded that a particular
Novartis drug may appropriately be prescribed for a particular
patient. But it is reasonable to view what occurs between the
physicians and the Reps as less than a "sale. "

Novartis suggests that "sale" should be read broadly in
light of the statement in the Preamble that " '[employees have a
primary duty of making sales if they "obtain a commitment to buy"
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from the customer and are credited with the sale. '" (Novartis
brief on appeal at 23 (quoting 2004 Final Rule at 22162) (emphases
in brief) .) It argues that the Reps "make sales in some sense"
because "they are responsible for eliciting commitments from the
physicians on whom they call to write prescriptions for NPC drugs
and that these prescriptions are, in essence, orders for NPC drugs
to be used by the patients in purchasing the drugs from
pharmacies." (Novartis brief on appeal at 25-26 (emphasis in
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original) (internal quotation marks omitted) . ) Novartis's
emphatic reliance on the word "commitments, " however, does not
lead to a conclusion that the Reps make sales, for it ignores the
nature of the "commitment" expressly envisioned by the Secretary

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in enacting the regulations: "a commitment to buy, " 2004 Final
Rule at 22162, 22163 (emphasis added). The 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. As the district court noted, "physicians have an
ethical obligation to prescribe only drugs suitable for their
patients' medical needs, meaning that they cannot make a binding
commitment to a Rep to prescribe" a particular Novartis product.
Novartis I, 593 F.Supp. 2d at 650 (emphasis added). Thus, although
physicians may say that they will prescribe a given Novartis drug
for patients with appropriate diagnoses, such an assurance is not
a binding commitment, and physicians remain entirely free to
prescribe a competing product made by a company other than
Novartis.

In sum, where the employee promotes a pharmaceutical
product to a physician but can transfer to the physician nothing
more than free samples and cannot lawfully transfer ownership of
any quantity of the drug in exchange for anything of value, cannot
lawfully take an order for its purchase, and cannot lawfully even
obtain from the physician a binding commitment to prescribe it, we
conclude that it is not plainly erroneous to conclude that the
employee has not in any sense, within the meaning of the statute
or the regulations, made a sale.

Novartis points out that a number of district courts have
held that pharmaceutical sales representatives are exempt from
the FLSA overtime pay requirements as outside salesmen (and/or

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administrative employees). Those cases are, of course, not
binding on us, and their reasoning does not persuade us that the
Secretary's interpretations of the regulations should be
disregarded. To the extent that the pharmaceuticals industry
wishes to have the concept of "sales" expanded to include the
promotional activities at issue here, it should direct its efforts
to Congress, not the courts. Given the existing statute and
regulations, we conclude that the district court should have ruled
that the Reps are not outside salesmen within the meaning of the
FLSA and the regulations.

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C. The "Administrative" Employee Exemption
12
The Secretary's regulations interpreting the FLSA
exemption for "any employee employed in a bona fide
administrative . . . capacity, " 29 U.S.C. § 213 (a) (1), establish
three criteria that must be met for an employee to fit within that
category. To be such an "administrative" employee, (1) the
employee must earn at least $455 a week, (2) his "primary duty"
must be "the performance of office or non-manual work directly
related to the management or general business operations of the
employer or the employer's customers, " and (3) his "primary duty"
must "include [] the exercise of discretion and independent
judgment with respect to matters of significance, " 29 C.F.R.
§ 541.200 (a) ; see, e.g., id. § 541.201 (elaborating on the second
criterion) ; id. § 541.202 (elaborating on the third criterion) .
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For purposes of this appeal, the relevant issue is whether

Novartis has adduced sufficient evidence to permit a rational
juror to infer that the Reps meet the third criterion.

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With respect to the requirement that the employee's
primary duty include "the exercise of discretion and independent
judgment with respect to matters of significance, " the regulations
provide, in relevant part, as follows:

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In general, the exercise of discretion and
independent judgment involves the comparison and the
evaluation of possible courses of conduct, and acting
or making a decision after the various possibilities
have been considered. The term "matters of
significance" refers to the level of importance or
consequence of the work performed.

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(b) The phrase "discretion and independent
judgment" must be applied in the light of all the
facts involved in the particular employment situation
in which the question arises. Factors to consider
when determining whether an employee exercises
discretion and independent judgment with respect to
matters of significance include, but are not limited
to: whether the employee has authority to formulate,
affect, interpret, or implement management policies
or operating practices; whether the employee carries
out major assignments in conducting the operations of
the business; whether the employee performs work that
affects business operations to a substantial degree,
even if the employee's assignments are related to
operation of a particular segment of the business;
whether the employee has authority to commit the
employer in matters that have significant financial
impact; whether the employee has authority to waive
or deviate from established policies and procedures
without prior approval; whether the employee has
authority to negotiate and bind the company on
significant matters; whether the employee provides
consultation or expert advice to management; whether

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the employee is involved in planning long- or
short-term business objectives; whether the employee
investigates and resolves matters of significance on
behalf of management; and whether the employee
represents the company in handling complaints,
arbitrating disputes or resolving grievances.

(e) The exercise of discretion and independent
judgment must be more than the use of skill in
applying well-established techniques, procedures or
specific standards described in manuals or other
sources. . . .

Id. § 541.202 (a), (b), and (e) .

On appeal, the Reps contend that they do "low-level,
discretionless marketing work, strictly controlled by Novartis, "
and that their duties and authority do not satisfy the
requirements for applicability of the administrative employee
exemption. (Plaintiffs' brief on appeal at 40.) Novartis, in
contending that the Reps exercise discretion and independent
judgment, argues that the Reps, for example, "must determine how
best to develop a rapport with a physician and develop strategies
to engage physicians in an interactive dialogue to draw out their
patient concerns, treatment styles and predilections"; must "be
able to react to expressed physician concerns by emphasizing
particular clinical findings regarding the efficacy and safety of
NPC's drugs for specific patient types"; "must determine when and
how to deliver the [Novartis-determined core] message, taking into
consideration, " e.g., "the prior call history with each physician,
the physician's time constraints, expressed concerns,
prescription-writing tendencies and patient population"; and must
"determine how best to close each call by evaluating whether
sufficient groundwork has been laid to seek the physician's
commitment on that call to write prescriptions." (Novartis brief
on appeal at 50-51.)

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The Secretary points out that the regulations make clear
that the requirement for authority to "exercise . . . discretion
and independent judgment" means more than simply the need to use
skill in applying well-established techniques or procedures
prescribed by the employer, see 29 C.F.R. § 541.202 (e). The
Secretary takes the position that for the administrative
exemption to apply to the Reps, the regulations require a showing
of a greater degree of discretion, and more authority to use
independent judgment in matters of significance, than Novartis
allows the Reps. Again we find it appropriate to defer to the
Secretary's interpretation.

Comparing the record as to the Reps' primary duties
against the illustrative factors set out in § 541.202 (b), for
example, we see 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. Although Novartis argues that the Reps do
commit Novartis financially when they enter into contracts with
hotels, restaurants, and other venues for promotional events,
"which may cost NPC thousands of dollars" (Novartis brief on
appeal at 3-4), the record reveals that the Reps have been given
budgets for such events by the Novartis managers and that the Reps

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have no discretion to exceed those budgets. Nor have we been
pointed to any evidence that the Reps have authority to negotiate
and bind Novartis on any significant matters, or have authority to
waive or deviate from Novartis's established policies and
procedures without its prior approval. What Novartis
characterizes as the Reps' exercise of discretion and independent
judgment -- ability to answer questions about the product, ability
to develop a rapport with a physician who has a certain social
style, ability to remember past conversations with a given
physician, ability to recognize when a message has been
persuasive -- are skills gained and/or honed in their Novartis
training sessions. As described in Part I.A. above, these skills
are exercised within severe limits imposed by Novartis. Thus, it
is undisputed that the Reps, inter alia,

" have no role in planning Novartis's marketing
strategy;

" have no role in formulating the "core messages" they
deliver to physicians;

" are required to visit a given physician a certain
number of times per trimester as established by Novartis;

" are required to promote a given drug a certain number
of times per trimester as established by Novartis;

" are required to hold at least the number of
promotional events ordered by Novartis;

" are not allowed to deviate from the promotional "core
messages" ;

" and are forbidden to answer any question for which
they have not been scripted.

Novartis argues that the Reps exercise a great deal of
discretion because they are free to decide in what order to visit

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physicians' offices, free to decide how best to gain access to
those offices, free to decide how to allocate their Novartis
budgets for promotional events, and free to determine how to
allocate their samples. (See Novartis brief on appeal at 51.) In
light of the above controls to which Novartis subjects the Reps,
we agree with the Secretary that the four freedoms advanced by
Novartis do not show that the Reps are sufficiently allowed to
exercise either discretion or independent judgment in the
performance of their primary duties. Accordingly, we conclude
that the district court should have ruled that the Reps are not
bona fide administrative employees within the meaning of the FLSA
and the regulations.

## D. State Law

The district court concluded that the overtime wage
requirements of New York law and California law are not
meaningfully different from the requirements of the FLSA, see
Novartis I, 593 F. Supp. 2d at 654, 658, and no party has argued
on this appeal that the requirements differ. Accordingly, we also
vacate the district court's rulings that the Reps fall within the
exemptions provided by state law.

# CONCLUSION

We have considered all of Novartis's arguments in support
of the judgment and have found in them no merit. We vacate the

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judgment of the district court and remand for further proceedings

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not inconsistent with this opinion.

In re Novartis Wage and Hour Litigation 1 2 3 4 5 6 7

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