U.S. Supreme Court Holds Pharmaceutical Sales Representatives Are Exempt Outside Sales Employees And Rebukes DOL's Efforts To Regulate Via Amicus Filings

On June 18, 2012, the U.S. Supreme Court issued its eagerly anticipated opinion in Christopher v. SmithKline Beecham Corp., 2012 U.S. LEXIS 4657, slip op. No. 11–204 (2012), one of the only Supreme Court cases to address the overtime exemptions under the Fair Labor Standards Act (FLSA), and the first to address the criteria for the application of the "outside sales" exemption. In a 5-4 decision, the Supreme Court held that pharmaceutical sales representatives (PSRs) employed by GlaxoSmithKline PLC were primarily engaged in "making sales," and therefore were properly classified as exempt under the outside sales exemption. In reaching that decision, the Supreme Court rejected the U.S. Department of Labor's (DOL) narrow interpretation of the outside sales exemption, as announced by the agency for the first time through unsolicited amicus curiae briefing, outside of notice and comment rulemaking procedures. The Supreme Court's decision in Christopher represents not only a significant victory for the pharmaceutical industry and employers generally, but also will have a far-reaching effect on federal agencies by limiting their ability to effectuate new interpretations of federal statutes and applicable regulations via amicus briefs.

Deference to the DOL's Interpretive Position

Before addressing in detail the application of the outside sales exemption to PSRs, the majority first discussed whether the amicus position of the DOL – that PSRs were not properly classified as exempt under the FLSA's outside sales exemption – should be afforded deference by federal courts under Auer v. Robbins. That part of the Court's opinion is striking for two reasons. First, whereas the Court was divided 5-4 on the application of the outside sales exemption to PSRs, even the dissenters agreed that the DOL's opinions stated for the first time in amicus briefs should not be given any especially favorable weight. Second, the opinion included a scathing rebuke of the DOL's effort to impose its regulatory interpretations on the federal courts without first engaging in the type of "notice and comment rulemaking" that is the hallmark of a federal agency's ability to issue guidance interpreting statutes and regulations the agency is charged with enforcing.

In Christopher, the Court agreed with the U.S. Court of Appeals for the Ninth Circuit that, while Auer ordinarily calls for deference to an agency's interpretation of its own ambiguous regulation – even when that interpretation is advanced in a legal brief – this general rule does not apply when the agency's interpretation is "plainly erroneous or inconsistent with the regulation," the interpretation "does not reflect the agency's fair and considered judgment on the matter," or when deference would result in "unfair surprise." It appears the Court found that all of these exceptions to the general rule applied to the DOL's position in Christopher. The Court was particularly troubled by the DOL's announcement of new regulatory interpretations, bypassing rulemaking and notice procedures, and creating unfair surprise for an entire industry:

"Petitioners invoke the DOL's interpretation of ambiguous regulations to impose potentially massive liability on respondent for conduct that occurred well before that interpretation was announced. To defer to the agency's interpretation in this circumstance would seriously undermine the principle that agencies should provide regulated parties 'fair warning of the conduct [a regulation] prohibits or requires.'"

The Court took further issue with the DOL's practice of changing its regulatory interpretations mid-stream and informing the pharmaceutical industry of its view that PSRs are not exempt only in amicus briefs filed after private litigation had begun, stating:

"It is one thing to expect regulated parties to conform their conduct to an agency's interpretations once the agency announces them; it is quite another to require regulated parties to divine the agency's interpretations in advance or else be held liable when the agency announces its interpretations for the first time in an enforcement proceeding and demands deference."

In this regard, the Court noted that until 2009, the...