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In re Novartis Wage and Hour Litigation

January 12, 2009

IN RE NOVARTIS WAGE AND HOUR LITIGATION


The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge

OPINION & ORDER

This consolidated class action lawsuit*fn1 raises the question of whether individuals employed as Pharmaceutical Sales Representatives ("Reps") are entitled to overtime pay under the federal Fair Labor Standards Act (the "FLSA" or "Act"), 29 U.S.C. §§ 201 et seq., and corresponding state wage and hour laws. Plaintiffs in this action are current and former Reps employed by Defendant Novartis Pharmaceuticals Corporation ("NPC") in New York, California, and other states.*fn2 They claim they qualify for overtime pay, and seek unpaid overtime wages, under the FLSA, as well as under the corresponding laws of New York and California.

NPC contends that Plaintiffs are not entitled to overtime pay because they fall within the "outside sales" and "administrative" exemptions to both the federal and state overtime requirements. NPC also argues that certain members of the Plaintiff class are exempt from the FLSA's overtime requirement because they qualify as "highly compensated" employees.

Both parties have moved for summary judgment, and both claim there are no genuine issues of material fact. Having reviewed the extensive record and heard oral argument from the parties, the Court agrees there are no factual issues, and that judgment as a matter of law is appropriate. Plaintiff 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 exempt. NPC's motion for summary judgment is therefore GRANTED and Plaintiff's motion for summary judgment is DENIED.

BACKGROUND

I. Facts

Although the parties draw different legal conclusions from the factual record, the material facts themselves are straightforward and essentially undisputed.*fn3 NPC researches, develops, manufactures, markets, and sells pharmaceutical drugs. It is one of the largest drug manufacturers in the United States, with approximately 13,000 employees nationwide.

More than 6,000 of these employees are Pharmaceutical Sales Representatives. In 2005, Reps earned an average salary of $91,500-meaning that, for the year, NPC spent a total of roughly half a billion dollars on Reps' salaries. Some Reps earn in excess of $100,000 per year. NPC advertises its Rep positions as sales positions, and seeks to fill them with college graduates who are self-motivated, can work independently, and demonstrate good communication and interpersonal skills. When hired, Reps are told that they are a part of NPC's sales force and that they will be engaged in selling NPC products. Because new Reps often lack pharmaceutical backgrounds, NPC provides them with basic training in anatomy, physiology, pharmacology, and other subjects. New Reps are also trained in sales techniques before being sent out into the field. NPC supplements this initial training with continuing education sessions during the course of the Reps' employment.

The primary function of the Reps is calling on physicians and giving them information about NPC's drugs. Each Rep is assigned to a geographic territory and provided with a target list of physicians. Reps are further divided into three categories: "Mass Market" Reps call on general practice physicians; "Specialty" Reps call on specialists such as cardiologists or neurologists; and "Hospital" Reps call on major medical centers and teaching hospital personnel. Reps are assigned certain NPC drugs depending upon the type of physicians on their target list- for example, a Specialty Rep responsible for visiting a number of cardiologists would be assigned NPC drugs that are appropriate for a cardiologist to prescribe. Indeed, the goal of the Reps' visits is to educate the physicians about NPC drugs so that the physicians may write prescriptions for those drugs where doing so would be appropriate for the physicians' patients.

Since the Reps are advocating products which are routinely and closely regulated by the Food and Drug Administration (FDA), NPC prepares scripts and related materials which the Reps are expected to use to deliver a "core message" about NPC products to each physician they visit. Reps may not go beyond the boundaries of the messages crafted by NPC. For example, Reps may not make claims about the effectiveness of NPC's products, nor can they comment adversely on a competitor's product, unless these claims have been cleared by NPC. NPC also controls the methods by which Reps may convey their message. NPC provides Reps with drug samples, pamphlets, clinical studies, visual aids, and other materials, and gives instructions on how these materials should be used during the Reps' presentations.

While NPC provides Reps with core messages and supporting materials, Reps have discretion as to when and how they deploy them. Reps plan their daily call schedules and decide when to visit each doctor on their target list. Within the parameters set by NPC, Reps are expected to tailor their presentations to each individual physician based upon such variables as the amount of time the physician allocates to meeting with the Rep; the physician's patient base and prescribing habits; and the Rep's assessment of the physician's personality. In addition, NPC provides Reps with budgets that they are expected to use to organize "lunch-and-learn" presentations and other informational events for the physicians on their list. Reps select the speakers and invitees for these informational events following guidelines set by NPC.

Under applicable FDA regulations, Reps are barred from selling NPC drugs directly to physicians. Instead, Reps focus on persuading physicians to write prescriptions that are ultimately used by patients in order to obtain NPC products from a pharmacy. Reps are expected to end each physician visit with a "close." Ideally, a Rep closes a visit by asking the physician for a non-binding commitment to prescribe NPC drugs where doing so is appropriate for a patient. At other times, a Rep might close by asking the physician to review a clinical study supporting the use of an NPC product or even simply thanking the physician for his or her time.

In addition to base pay, Reps receive "incentive payments." These incentive payments are tied to the number of prescriptions written by physicians within the Reps' territory for drugs to which the Reps is assigned. Plaintiffs concede that between 15% and 25% of a Rep's average annual salary of $91,500 consists of incentive pay. Payments of between $13,725 and $22,875 are significant components of a Rep's annual salary. Additionally, NPC provides Reps with company cars and fuel costs to facilitate their physician visits. High-performing Reps are eligible for additional benefits such as all-expenses-paid vacations.

Reps do not work out of NPC's offices. They work from their homes, and spend most of their day traveling, in their company-provided vehicles, from physician to physician. Once every four to six weeks, their managers accompany them on their calls in what is known as a "ride-along." Aside from these ride-alongs, Reps are generally on their own, subject to such supervision as can be gained by cell phone and e-mail communications with supervisors. Although NPC expects Reps to be in the field making calls from 8 a.m. to 5 p.m. each weekday, and expects Reps to call on a certain number of physicians each day, Reps are ultimately responsible for organizing their daily activities.

At all times relevant to the present action, NPC classified its Reps as exempt from the FLSA's overtime requirement. Plaintiffs have no complaint about their salary, which is well in excess of the statutory minimum. Instead, Plaintiffs contend they should be compensated at time-and-a-half for hours worked in excess of 40 hours per week.

II. The Fair Labor Standards Act (FLSA) and Corresponding State Laws

A. The FLSA

The FLSA was enacted 70 years ago, in 1938, to eliminate "labor conditions detrimental to the maintenance of the minimum standard of living necessary for health, efficiency, and general well-being of workers." 29 U.S.C. § 202(a). To that end, the FLSA imposes various wage and hour requirements, including the overtime requirement at issue in the present case. Section 207(a)(1) of the Act provides that "no employer shall employ any of his employees.for a workweek longer than forty hours 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." Id. § 207(a)(1).

Section 213(a)(1) establishes the so-called "white collar" exemptions to the overtime requirement, including the outside sales and administrative exemptions. See id. § 213(a)(1). In 2004, the Department of Labor ("DOL")*fn4 explained the rationale behind these exemptions:

The legislative history [of the FLSA] indicates that the section 13(a)(1) exemptions were premised on the belief that the workers exempted typically earned salaries well above the minimum wage, and they were presumed to enjoy other compensatory privileges such as above average fringe benefits and better opportunities for advancement, setting them apart from the nonexempt workers entitled to overtime pay. Further, the type of work they performed was difficult to standardize to any time frame and could not be easily spread to other workers after 40 hours in a week, making compliance with the overtime provisions difficult and generally precluding the potential job expansion intended by the FLSA's time-and-a-half overtime premium.

Dep't of Labor, Wage and Hour Division, Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales and Computer Employees; Final Rule ("DOL 2004 Final Rule"), 69 Fed. Reg. 22122, 22123-24 (Apr. 23, 2004).

Due to the remedial nature of the FLSA's overtime requirement, however, exemptions should be "narrowly construed against the employers seeking to assert them and their application limited to those establishments plainly and unmistakably within their terms and spirit." Bilyou v. Dutchess Beer Distribs., Inc., 300 F.3d 217, 222 (2d Cir. 2002) (quoting Arnold v. Ben Kanowsky, Inc., 361 U.S. 388, 392 (1960)). An employer who invokes an exemption bears the burden of proving that its employees are exempt. See Bilyou, 300 F.3d at 222.

1. The Outside Sales Exemption

FLSA section 213(a)(1) exempts from overtime compensation "any employee employed.in the capacity of outside salesman." 29 U.S.C. § 213(a)(1). An outside salesperson is defined as any employee:

(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.

29 C.F.R. § 541.500(a).

The terms "sale" and "sell" include "any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition." 29 U.S.C. § 203(k). The DOL has further indicated 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." 29 C.F.R. § 541.501(b). In the 1940 "Stein Report," the DOL stated that it would be improper to extend the outside sales exemption to "anyone who does not in some sense make a sale." Dep't of Labor, Wage and Hour and Public Contracts Divisions, Report and Recommendations of the Presiding Officer (Harold Stein) on Proposed Revisions of Regulations (Oct. 10, 1940) ("Stein Report") at 46; see also DOL 2004 Final Rule, 69 Fed. Reg. at 22162 ("An employer cannot [apply the outside sales exemption] unless it demonstrates that the employee, in some sense, has made sales.").

An employee's primary duty is "the principal, main, major or most important duty that the employee performs." 29 C.F.R. § 541.700(a). A determination of an employee's primary duty "must be based on all the facts in a particular case, with the major emphasis on the character of the employee's job as a whole." Id. For the purposes of determining whether an employee falls within the outside sales exemption, all work that is "performed incidental to and in conjunction with the employee's own outside sales or solicitations" or "that furthers the employee's sales efforts" must be counted as exempt outside sales work. Id. § 541.500(b). In other words, once it has been determined that an employee makes sales, all work done by that employee incidental to those sales must be taken into account when determining whether sales work constitutes the employee's primary duty.

The DOL's regulations draw a distinction between exempt and non-exempt promotional work. "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." Id. § 541.503(a). The DOL gives an example of promotional work incidental to sales made by others: a manufacturer's representative who visits a customer's shop for the purposes of "putting up displays and posters, removing damaged or spoiled stock from the merchant's shelves or rearranging the merchandise." Id. § 541.503(b). Further, in a 1999 Opinion Letter, the DOL determined that college recruitment counselors were not exempt outside salespersons because they were "not engaged in making sales of the college's services, or obtaining contracts for its services." Opinion Letter No. 2138 [1999-02 Wages-Hours] Lab. L. Rep. (CCH) ¶ 33030 (Apr. 20, 1999). ...


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