Christopher et al. v. Smithkline Beecham Corp., dba Glaxosmithkline holds, 5-4, that pharma sales reps are exempt as "outside salespersons"

The United States Supreme Court, in Christopher et al. v. Smithkline Beecham Corp., dba Glaxosmithkline (June 18, 2012), examined the question of whether pharmaceutical sales representatives, whose primary duty was to obtain nonbinding commitments from physicians to prescribe their employer’s prescription drugs, were correctly classified as exempt from overtime pay requirements set forth in the Fair Labor Standards Act.  In the courts below, defendant moved for summary judgment, arguing that plaintiffs were “employed in the capacity of outside salesman,” §213(a)(1), and therefore were exempt from the FLSA’s overtime compensation requirement. The District Court agreed and granted summary judgment to defendant. Plaintiffs filed a motion to alter or amend the judgment, contending that the District Court had erred in failing to accord controlling deference to the DOL’s interpretation of the pertinent regulations, which the DOL had announced in an amicus brief filed in a similar action. The District Court rejected this argument and denied the motion. The Ninth Circuit, agreeing that the DOL’s interpretation was not entitled to controlling deference, affirmed.

The opinion was decided on sharply divided 5-4 lines, with one majority opinion and one minority opinion. The opinion considered three of the DOL’s regulations: §§541.500, 541.501, and 541.503. The Court referred to the three regulations as the “general regulation,” the “sales regulation,” and the “promotion-work regulation,” respectively.

First, the majority observed that the DOL’s own interpretation of its regulations was not consistent over time. In briefs filed before the Second and Ninth Circuits, “the DOL took the view that ‘a “sale” for the purposes of the outside sales exemption requires a con- summated transaction directly involving the employee for whom the exemption is sought.’” Slip op., at 9. After certiorari was granted in this matter, the DOL took the position that “ ‘[a]n employee does not make a “sale” for purposes of the “outside salesman” exemption unless he actually transfers title to the property at issue.’ ” Slip op., at 9.

Next, the majority observed that Auer deference to the DOL’s ambiguous regulations was not justified because to do so would allow for imposition of “potentially massive liability on respondent for conduct that occurred well before that interpretation was announced.” Slip op., at 10. Continuing, the Court said:

Until 2009, the pharmaceutical industry had little reason to suspect that its longstanding practice of treating detailers as exempt outside salesmen transgressed the FLSA. The statute and regulations certainly do not provide clear notice of this. The general regulation adopts the broad statutory definition of “sale,” and that definition, in turn, employs the broad catchall phrase “other disposition.” See 29 CFR §541.500(a)(1). This catchall phrase could reasonably be construed to encompass a nonbinding commitment from a physician to prescribe a particular drug, and nothing in the statutory or regulatory text or the DOL’s prior guidance plainly requires a contrary reading. See Preamble 22162 (explaining that an employee must “in some sense” make a sale); 1940 Report 46 (same).

Slip op., at 12. Then the majority noted that, despite the industry’s decades of applying an exempt classification, the DOL never initiated any enforcement action.

The majority then discussed the DOL’s interpretations and found them unpersuasive, particularly with respect to the definition of “sale.” The Court held:

This new interpretation is flatly inconsistent with the FLSA, which defines “sale” to mean, inter alia, a “consignment for sale.” A “consignment for sale” does not involve the transfer of title. See, e.g., Sturm v. Boker, 150 U. S. 312, 330 (1893) (“The agency to sell and return the proceeds, or the specific goods if not sold . . . does not involve a change of title”); Hawkland, Consignment Selling Under the Uniform Commercial Code, 67 Com. L. J. 146, 147 (1962) (explaining that “‘[a] consignment of goods for sale does not pass the title at any time, nor does it contemplate that it should be passed’” (quoting Rio Grande Oil Co. v. Miller Rubber Co. of N. Y., 31 Ariz. 84, 87, 250 P. 564, 565 (1926))).

Slip op., at 15. The majority then spends some time construing the regulation itself, concluding that the language of the statute was intended to broadly include all manner of transactions that, in certain industries, were tantamount to a sale in the most conventional sense. In the regulated industry of pharmaceutical sales, the majority observed that the representatives did all that was allowed:

Obtaining a nonbinding commitment from a physician to prescribe one of respondent’s drugs is the most that petitioners were able to do to ensure the eventual disposition of the products that respondent sells. This kind of arrangement, in the unique regulatory environment within which pharmaceutical companies must operate, comfortably falls within the catch- all category of “other disposition.”

Slip op., at 20-21.

The minority opinion, authored by Justice Breyer, accepted the majority’s description of the job in question and agreed that deference to the DOL interpretation was not justified given the recent change in that interpretation. Instead, the minority opnion simply disagrees with the construction of the language at issue:

Unless we give the words of the statute and regulations some special meaning, a detailer’s primary duty is not that of “making sales” or the equivalent. A detailer might convince a doctor to prescribe a drug for a particular kind of patient. If the doctor encounters such a patient, he might prescribe the drug. The doctor’s client, the patient, might take the prescription to a pharmacist and ask the pharmacist to fill the prescription. If so, the pharmacist might sell the manufacturer’s drug to the patient, or might substitute a generic version. But it is the pharmacist, not the detailer, who will have sold the drug.

Minority slip op., at 3. The minority opinion concludes that the representatives stimulate sales eventually made by others:

The detailer’s work, in my view, is more naturally characterized as involving “[p]romotional activities designed to stimulate sales . . . made by someone else,” §541.503, e.g., the pharmacist or the wholesaler, than as involving “[p]romotional activities designed to stimulate” the detailer’s “own sales.”

Minority slip op., at 5. The minority emphasized the fact that doctors determine what to prescribe, based on medical need:

To the contrary, the document makes clear that the pharmaceutical industry itself understands that it cannot be a detailer’s “primary duty” to obtain a nonbinding commitment, for, in respect to many doctors, such a commitment taken alone is unlikely to make a significant difference to their doctor’s use of a particular drug. When a particular drug, say Drug D, constitutes the best treatment for a particular patient, a knowledgeable doctor should (hence likely will) prescribe it irrespective of any nonbinding commitment to do so. Where some other drug, however, is likely to prove more beneficial for a particular patient, that doctor should not (hence likely will not) prescribe Drug D irrespective of any nonbinding commitment to the contrary.

Minority slip op., at 6. The minority concluded by dismissing the majority’s fears that a salesman who takes an order would suddenly become non-exempt by transferring the order to jobber’s employee to be filled. The minority noted that the example created no basis for fear, given that the salesman had obtained a firm commitment to buy the product. Regardless of the quality of the counter-arguments, the minority opinion by Justice Breyer is just that, a minority opinion, and "sales" are evidently in the eye of the beholder.

$15 million misclassification class judgment reversed in Duran v. U.S. Bank National Association

Exemption-based misclassification cases are hard to certify.  But when you certify an overtime exemption misclassification case, try it, and win a $15 million verdict, you'd think that the hard times are behind you.  Not so fast.  In Duran v. U.S. Bank National Association (February 6, 2012), the Court of Appeal (First Appellate District, Division One) reversed that verdict, decertified the class, and sent the whole thing back down to the trial court for further consideration of how to resolve the individual break claims in light of Brinker.

The plaintiffs in the case were 260 current and former business banking officers (BBO's) who claimed they were misclassified by USB as outside sales personnel exempt from California‘s overtime laws.  The procedural history was messy.  Exemption defenses were summarily adjudicated.  The defendant moved unsuccessfully to decertify.  The trial included motions about evidentiary exclusions.  It appears from the summary that a substantial amount of evidence the defendant sought to introduce was excluded from the trial.  Significantly, a small survey was conducted and then relied upon by a statistics expert to determine class-wide liability.

The Court issued a number of significant holdings, which all revolve around the propriety of proving liability in a misclassification class action with statistical evidence, as opposed to proving damages once liability is established.  For example, the Court held that use of statistical evidence to prove liability is inconsistent with cases examining such evidence at certification:

USB claims California law precludes class-wide liability determinations based on evidence obtained from a representative sample in employment cases alleging misclassification. USB relies on several state and federal wage and hour class action cases for the proposition that surveying, sampling, and statistics are not valid methods of determining liability because representative findings can never be reasonably extrapolated to absent class members in misclassification claims given that time spent performing exempt tasks may differ between employees. While all the cases cited by USB involve rulings on motions to certify or decertify class actions, they support the conclusion that improper procedures were followed in this case.

Slip op., at 47-48.  The Court also held that statistical sampling for proof of liability is inconsistent with its Bell III decision:

The procedures we approved in Bell III are only superficially similar to the procedures utilized in the present case.  Again, in Bell III we did not have occasion to consider the use of a representative sample to determine class-wide liability, since liability was not an issue on appeal. Accordingly, the only issue we addressed was the damages calculation itself, and not whether the plaintiff employees had a right to recover damages in the first place. And our assessment was based on a record evidencing cooperation and agreement among the parties and their counsel.

Slip op., at 45.  With respect to Bell III, the Court explained that the present case suffered a number of flaws (sample too small, no test studies to set sample size, lack of randomness, and no cooperation between the parties) not found in Bell III.  The Court then said:

Fifth, the restitution award here was affected by a 43.3 percent margin of error, more than 10 percentage points above the margin of error for the double-overtime award we invalidated in Bell III. In absolute terms, the average weekly overtime hour figure could conceivably be as low as 6.72 hours per week, as opposed to the 11.86 hour figure arrived at here. While we again will not set a bright line for when a margin of error becomes so excessive as to be deemed unconstitutional, we are troubled by this result.

Slip op., at 46.

Next, the Court concluded that the exclusion of 78 sworn statements that, if admitted, would have reduced the class size by about one-third, was a prejudicial error that violated the defendant's due process right to present relevant evidence in its defense: "The evidence USB sought to introduce, if deemed persuasive, would have established that at least one-third of the class was properly classified. Thus, this evidence USB sought to introduce is unquestionably relevant and therefore admissible."  Slip op., at 55.

The Court then explained that the fatal flaw in the trial management plan was the exclusion of virtually all means by which the defendant could have defended against class-wide liability:

Fundamentally, the issue here is not just that USB was prevented from defending each individual claim but also that USB was unfairly restricted in presenting its defense to class-wide liability. With that in mind, the cases relied on by plaintiffs are inapposite. Both Long v. Trans World Airlines, Inc. (N.D.Ill. 1991) 761 F.Supp. 1320 [protective order limited discovery of information from plaintiff flight attendants to a representative sample of class members], and In re Antibiotic Antitrust Actions (S.D.N.Y. 1971) 333 F.Supp. 278 [states sought recovery for alleged overcharges in the sale of certain antibiotics], concerned the damages phase of a trial, not the liability phase.

Slip op., at 58.  So, when a defendant asserts that this case stands for the proposition that it gets to defend agasint each individual class member's claim, be sure to remind the defendant and Court that the holding actually criticized the absence of any means to mount a defense, rather than specifying the specific forms that a reasonable opportunity to defend must take:

In sum, the court erred when, in the interest of expediency, it constructed a set of ground rules that unfairly prevented USB from defending itself. These ground rules were the product of the trial court. We do not suggest that the implementation of any particular additional procedural tool would have satisfied due process. We simply hold that the court, having agreed to try this matter as a class action, denied USB the opportunity to defend itself by flatly foreclosing the admission of potentially relevant evidence.

Slip op., at 60.

The Court spent some additional time commenting on the margin of error near 44 percent, which it found to be unacceptably large to form the basis of any reasonable result.  The Court concluded its opus by finding that, under the second motion to decertify, the trial court erred by failing to decertify the class.

I think I can sum all this up by observing that (1) misclassification cases in the exemption context are difficult cases and getting tougher all the time, and (2) defendants will incorrectly claim that this decision stands for a mythical due process right that the defendant gets to challenge each class member's claim.  Can't help with one, and can't stop two, but as to two, you can point out that there are many ways to provide a defendant with a reasonable opportunity to defend against class liability.

In Muldrow v. Surrex Solutions Corp., court holds that commissions need not be strict percentage of sales

Trials of class actions are uncommon.  Here, though, we have an example of a class action that made it through trial (though admittedly a bench trial, which is more like a long and painful, multi-day summary judgment hearing).  In Muldrow v. Surrex Solutions Corp. (January 24, 2012), the Court of Appeal (Fourth Appellate District, Division One) considered "whether the trial court erred in determining that an employer was not required to pay overtime wages (Lab. Code, § 510) to a class of its current and former employees because they were subject to the commissioned employees exemption (Cal. Code. Regs., tit. 8, § 11070, subd. (3)(D))."

The class of employees was comprised of recruiters that located potential employees for clients of Surrex.  Surrex was paid only when an employee was successfully placed with a client.  The class members were paid a percentage of "adjusted gross profit."  The "adjusted gross profit" was calculated by subtracting various costs from the amount clients paid for a placement.

The Court reached two key conclusions that resulted in an affirmance for the trial court.  First, the Court concluded that "sales-related activities" should be viewed more broadly than the time involved in the sale itself:  "We also reject appellants' contention that time spent 'searching on the computer, searching for candidates on the website, cold calling, interviewing candidates, inputting data, and submitting resumes,' may not be considered sales-related activities."  Slip op., at 14.

Second, the Court concluded that "commissions" do not have to equal a fixed percentage of revenues:

We disagree that either the Keyes Motors court or the Ramirez court intended to preclude an employer from calculating commissions based on anything other than a straight percentage of profits. Most importantly, neither the Keyes Motors court nor the Ramirez court had any occasion to address this issue, because in both cases, the employees' commissions were based on a straight percentage of the price charged to the customer. (Keyes Motors, supra, 197 Cal.App.3d at p. 561 [The "mechanic earns a fixed percentage of the hourly rate charged the customer"]; Ramirez, supra, 20 Cal.4th at p. 804 [employee received a "percentage of the price of the bottles of water and related products sold"].) " ' "It is axiomatic that cases are not authority for propositions not considered." ' " (Silverbrand v. County of Los Angeles (2009) 46 Cal.4th 106, 127, citations omitted.) Thus, "the Keyes Motors definition of 'commission' . . . does not control our case." (Areso, supra, 195 Cal.App.4th at p. 1006.)

Slip op., at 17.  The Court then focused on incentives, distinguishing Keyes Motors and Ramirez:

In this case, in contrast, appellants affected not only the revenue that Surrex received, but also the costs that Surrex would bear. Paige Freeman, a senior consulting services manager, testified that consulting service managers negotiated both the rates that Surrex paid candidate/consultants and the rate at which Surrex billed clients for those services. Appellants therefore had an impact on both the revenue (bill rate) that Surrex received and the costs (pay rate) that Surrex incurred. Thus, while in Keyes Motors and Ramirez, a commission system based on the price of the products or services provided employees with an incentive to increase the number of repairs performed (Keyes Motors) or the number of bottles of water sold (Ramirez), in this case, a commission system based solely on revenue or price would fail to reward employees who helped Surrex achieve greater profits by limiting costs. We see nothing in Ramirez or Keyes Motors that requires such a result, particularly since neither court had occasion to consider a compensation system similar to the one at issue in this case.

Slip op., at 18.  This is all very interesting, but the Court cites no authority in support of its power to define commissions so as to apply the incentives that it views as, in some manner, "better."  Instead, the Court falls back to Black's Law Dictionary for its definition of commission.  Maybe someone has some regulatory history materials handy to check and see whether the Court has the right of what the IWC intended when it created this exemption.

District Court decertifies class of customer service representative employed by Safety-Kleen Systems, Inc.

United States District Court Judge Phyllis J. Hamilton (Northern District of California) granted Defendant Safety-Kleen Systems, Inc.'s motion to decertify a class of "customer service representatives."  Wamboldt v. Safety-Kleen Systems, Inc., 2010 WL 3743925 (N.D. Cal. Sept. 20, 2010).  The CSRs had duties extending well beyond what one might expect from the job title, including customer sales, client collections, and various telephone responsibilities, as well as on-site servicing of equipment, transportation of hazardous waste, and driving of company vehicles in order to perform customer service calls.  The hazardous waste transportation and the occasional use of large vehicles (in excess of 30,000 lbs. gross vehicle weight) were the primary culprits underlying the motion to decertify.

Class-related: Court of Appeal affirms wage law policies, power of trial court to direct order of proof

I briefly direct your attention to Pellegrino v. Robert Half International, Inc., in which the Court of Appeal (Fourth Appellate District, Division Three) affirmed a trial court judgment that invalidated a contractual agreement purporting to shorten statutes of limitation for wage & hour claims and decided an equitable defense of "administrative exemption" before the jury phase of the trial.