By:  Michael Thompson

In Ibanez v. Abbott Laboratories, Inc., the Eastern District of Pennsylvania issued the latest ruling in the ongoing dispute over whether pharmaceutical sales representatives are exempt from the overtime requirements of the FLSA. 

The plaintiff in Ibanez was a former sales representative for Abbott.  Among other things, the plaintiff helped create “business plans which tracked doctors by market share and potential.”  The plaintiff also developed “game plan[s] or strateg[ies] for individual calls with physicians.”  Thus, the District Court ruled that the plaintiff exercised significant independent discretion, and therefore fell within the Administrative exemption of the FLSA. 

This dispute over the exempt status of pharmaceutical sales representatives has arisen as plaintiffs have argued with increasing frequency that the representatives do not fall under the Outside Sales exemption.  This argument is based on the fact that these sales representatives do not “close” any sales.  Rather, a sale is closed outside the presence of a sales representative (when a patient fills a prescription at a pharmacy). Accordingly, plaintiffs contend, the Outside Sales exemption is inapplicable to these sales representatives and they are therefore entitled to overtime.

The battle lines in this dispute over the status of pharmaceutical sales representatives have been drawn around the rulings of three federal circuit courts: the Ninth Circuit, which has applied the Outside Sales exemption to these sales representatives; the Third Circuit, which has applied the Administrative exemption to these sales representatives; and the Second Circuit, which has declined to apply either exemption, found sales representatives to be non-exempt and therefore required employers to pay overtime compensation.

The Ninth Circuit Court of Appeals in Christopher v. SmithKline Beecham Corp., for example, rejected the argument that pharmaceutical sales representatives did not qualify for the Outside Sales exemption. The Ninth Circuit recognized that the sales representatives do not “close” direct sales.  However, the Court noted that the sales representatives were prohibited by law from making direct sales.  The Ninth Circuit accordingly held that, in the context of the industry, “common sense” showed that the pharmaceutical sales representatives fell within the terms of the Outside Sales exemption.

Conversely, in In re Novartis Wage & Hour Litigation, the Second Circuit Court of Appeals concluded that the Novartis sales representatives did not meet the requirements of the Outside Sales exemption because they did not “make sales.”  

The Second Circuit then evaluated whether the sales representatives had enough independent discretion to qualify for the Administrative exemption.  It was undisputed that the Novartis sales representatives were required to visit a given physician a certain number of times.  It was undisputed that the Novartis sales representatives were required to promote a given drug a certain number of times, and it was undisputed that the Novartis sales representatives were required to hold at least a certain number of promotional events per trimester.  Thus, the Second Circuit accepted the sales representatives claim that she did “low-level discretionless marketing work” and did not exercise sufficient discretion and independent judgment to satisfy the Administrative exemption

Finally, in Smith v. Johnson & Johnson, the Third Circuit Court of Appeals found that thus it was unnecessary to consider the Outside Sales Exemption because the sales representatives in that case satisfied the FLSA’s Administrative exemption.  The Third Circuit noted that the plaintiff developed her own strategic plan to achieve higher sales.  The plaintiff herself prioritized her responsibilities in a manner that maximized business results. Indeed, the plaintiff admitted that “[i]t was really up to [her] to run the territory the way [she] wanted to.”  The Third Circuit concluded that, by formulating and implementing the strategies for her territory, the plaintiff exercised sufficient independent discretion to qualify for the Administrative exemption

Like the plaintiff in the Johnson & Johnson case, the plaintiff in Ibanez exercised the discretion to develop his own business plans and thus stood in contrast to the plaintiff in the Novartis case.  Indeed, the District Court cited to twelve admissions made by the plaintiff regarding his job duties.  Seven of those admissions related to plaintiff developing various strategic plans (e.g. business plans, call plans, focus plans, etc.).

Thus, Ibanez further demonstratesthat the key to establishing the Administrative exemption for pharmaceutical sales representatives is the exercise discretion in formulating business strategies. Accordingly, sales representatives who help to create their own business plans have a strong argument for exempt status, while sales representatives who carry out strategies given to them have a more difficult argument.