Earlier today, the Second Circuit vacated a lower federal court decision that had dismissed a class action lawsuit by 2500 pharmaceutical representatives who claimed that they were improperly classified as exempt from overtime.  The decision paves the way for the class action to continue, and sets the stage for potentially other class actions against other drug companies on similar claims.  

The decision in "In re: Novartis Wage & Hour Litigation" (download here), focuses a lot on the "outside salesperson" exemption that exists under federal law. If an employee is properly classified as "outside salesperson", then they are not entitled to overtime on the work that they do.  

What is outside salesperson? Well, the court makes a distinction between obtaining commitments to buy and promoting sales.   In the Second Circuit’s view, merely promoting sales isn’t enough; the reps have to actually sell product or services.  

The court relies on both regulations and arguments made by the government that "make it clear that a person who promotes a product that will be sold by another person does not in any sense intended by the regulations, make the sale."

In reviewing the facts of this case, the court says what occurs between "physicians and the Reps [is] less than a ‘sale’".  

It concludes by saying:

[I]n 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.

The Second Circuit also rejects an argument that the employees fall within the administrative exemption as well because of the ability to bind the company with some financial commitments.

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….[T]hese skills are exercised within severe limits imposed by Novartis.  

It is because of these controls that the Court refuses to apply the exemption saying that the evidence does "not show that the Reps are sufficient allowed to exercise either discretion or independent judgment in the performance of their primary duties". 

(The case comes just a month or so after a jury found Novartis liable for gender discrimination against female sales representatives and awarded $250 million in punitive damages.) 

Obviously, this case has big implications for the pharmaceutical industry, particularly those companies based in Connecticut (which fall within the Second Circuit).  Moreover, those employers who use similar arrangements to pharmaceutical representatives should consider whether such employees are properly classified and should seek counsel if there are any questions.

UPDATE 7/7/10 – For additional background and reaction, Law.com has this update.  

(H/T Connecticut Employee Rights Blog