Supreme Court saves Big Pharma big money

The Supreme Court spared pharmaceutical companies a big expense in its Monday ruling against former sales representatives for GlaxoSmithKline, who sued to get paid for overtime. The reps worked for GSK's predecessor, SmithKline Beecham, but GSK inherited the litigation.

"The numbers would have been gigantic," said University of Michigan business professor Erik Gordon, who keeps track of the pharmaceutical industry. "It saves companies from writing some very big checks."

Michael Christopher and Frank Buchanan were the plaintiffs in the case, having been hired as pharmaceutical sales representatives in 2003, but they sought class-action status and estimates suggested the group could have included more than 90,000 reps.

Just the cost of the extra payroll accountants to figure out what each of those reps was due would have been a nasty hit to the books of pharmaceutical companies.

Judge Samuel Alito wrote the majority opinion in the 5-4 decision, which followed the conservative-liberal alignment of the court. He argued that the Fair Labor Standards Act (FLSA) had exemptions for certain categories of workers but the Labor Department had never adequately written regulations that might buttress an argument for not including pharmaceutical reps in the exempt categories.

"The exemption is premised on the belief that exempt employees normally earn salaries well above the minimum wage and perform a kind of work that is difficult to standardize to a particular time frame and that cannot easily be spread to other workers," Alito wrote. "Petitioners — each of whom earned an average of more than $70,000 per year and spent 10 to 20 hours outside normal business hours each week performing work related to his assigned portfolio of drugs in his assigned sales territory — are hardly the kind of employees that the FLSA was intended to protect."

A link to the Supreme Court's site and this ruling is here.

GSK said in a statement:

"GlaxoSmithKline plc is pleased that the U.S. Supreme Court has ruled that pharmaceutical sales representatives are indeed sales professionals who can appropriately be compensated with salary and incentive compensation.

"The Fair Labor Standards Act requires that an employee’s primary duty must be making sales while working away from the employer’s place of business. In finding that pharmaceutical sales representatives are covered by the outside sales exemption, the court has validated the way the pharmaceutical industry has classified its sales representatives for the last 70 years. That approach has compensated sales representatives fairly, and recognizes that sales professionals need the flexibility to schedule their work in a way that accommodates their schedules and the busy schedules of the healthcare providers they serve.

"We believe strongly in the value our sales professionals bring in conveying important information to health care providers. They present the benefits and risks of our products to physicians and other healthcare providers, and because they are sales professionals, we expect them to ask customers to commit to prescribe GSK products for appropriate patients consistent with the product label."

Michigan's Gordon said he was surprised the vote was so close and did not think the decision applied to many other industries because of the unusual, if not unique, nature of pharmaceutical sales practices.

Those practices were already changing for other reasons. Doctors and other health-care providers were less inclined to stop and listen to the sales pitch in the office. Some would argue that disclosures by news organizations of pharmaceutical payments to providers shed light on a conflict of interest that put patients in danger.

Regardless of cause, Big Pharma has been shifting to web tools and other means of spreading the marketing message, while laying off sales reps.

If GSK had lost in the Supreme Court, would that have accelerated the firings of reps?

"Yes," Gordon said. "Going forward, if pharma companies had to pay reps OT, it would have accelerated the thinning of the sales force. It would have been a double whammy. It would have been good for retired sales reps, but bad for pharma reps trying to keep their jobs."