Two recent appellate decisions address issues that may significantly impact the content of training given by pharmaceutical and medical-device companies to their sales professionals. In Christopher v. SmithKline Beecham Corp., 132 S. Ct. 2156 (2012), the U.S. Supreme Court found that two pharmaceutical sales representatives were exempt from the Fair Labor Standards Act (FLSA) requirement that employees receive overtime compensation when they work in excess of 40 hours per week. In United States v. Caronia, 703 F.3d 149 (2d Cir. 2012), the Second Circuit reversed on free-speech grounds the criminal conviction of a sales representative for promoting a pharmaceutical product for unapproved uses. Christopher effectively establishes an FLSA safe harbor for employers based on how life-sciences sales employees are trained, instructed, and evaluated about their primary job function. Caronia raises serious questions about the authority of the federal government to regulate truthful statements about the unapproved use of regulated products. Life-sciences companies and their counsel would do well to consider both of these decisions in designing and updating their sales-training programs.
Christopher: Claiming the FLSA Safe Harbor
In Christopher, a case closely watched throughout the industry, the Supreme Court ruled that two former SmithKline Beecham sales representatives, Michael Christopher and Frank Buchanan, were "outside salesmen" as that term is defined by the FLSA and applicable Department of Labor (DOL) regulations. As "outside salesmen," they were exempt from the FLSA's requirement that employees receive overtime compensation when working beyond 40 hours in a week. For decades, life-sciences companies have assumed that their sales representatives were exempt from the FLSA, and the DOL had never brought an enforcement action suggesting otherwise. In 2009, however, the DOL filed an amicus brief in the Second Circuit, contending for the first time that pharmaceutical sales representatives were not "outside salesmen" within the meaning of the statute and regulations and therefore were not exempt employees. The DOL's regulations define an "outside salesman" as any employee "[w]hose primary duty is . . . making sales." 29 C.F.R. § 541.500(a)(l). The DOL's Second Circuit amicus brief took the position that a "sale," for purposes of this regulation, "requires a consummated transaction directly involving the employee for whom the exemption is sought." Brief for Secretary of Labor as amicus curiae, In re Novartis Wage & Hour Litig., No. 09-437-cv (2d Cir. 2009). Because prescription drugs and medical devices may only be sold with a prescription, the sales representative could never "consummate" a sale as part of his or her presentation to a prescriber, therefore, under the DOL's interpretation, the sales representatives were not outside salesmen. The DOL took a similar position in Christopher,in which two sales representatives sued GlaxoSmithKline contending that they had improperly been denied overtime pay. With Justice Alito writing for a five-justice majority, the Christopher Court concluded that the DOL's definition of "sale" was impermissibly narrow. Rather, the Court reasoned, the definition of "sale" must include "those arrangements that are tantamount, in a particular industry, to a paradigmatic sale of a commodity." In other words, whatever amounts to an ordinary sale in a particular industry must be included in the FLSA's definition of "sale." Observing that "[o]btaining a nonbinding commitment from a physician to prescribe one of [the employer's] drugs is the most that [sales representatives] were able to do to ensure the eventual disposition of the products," the Court concluded that such nonbinding commitments are the equivalent of sales in the pharmaceutical industry. The Court then found that the "primary duty" of pharmaceutical sales representatives is “to obtain nonbinding commitments from physicians to prescribe their employer's prescription drugs in appropriate cases.” Based on these findings and conclusions, the Court held that the sales representatives were exempt as outside salesmen.
The ruling in Christopher was widely viewed as a significant victory for the life-sciences industry. A requirement to pay overtime retroactively to each of the more than 80,000 sales representatives in the industry would have been extremely costly and would have required significant modifications in life-sciences marketing practices. While the Christopher decision is clearly a positive result for life-sciences companies, it does not resolve the question once and for all. Instead, the ruling is limited by the Court's factual finding that a sales representative's primary duty is obtaining nonbinding commitments from physicians. Thus, for Christopher to control in a future case, an employer must make a factual showing that obtaining such "nonbinding commitments" is the primary duty of its sales representatives. As Justice Breyer wrote in dissent, this is probably not the current understanding within the industry. Rather, Justice Breyer argued, the primary purpose of a sales representative is more properly viewed as "providing information so that the doctor will keep the drug in mind with an eye toward using it when appropriate."
Properly viewed, Christopher offers life-science companies a safe harbor. If the company can show that the primary duty of its sales force is seeking and obtaining nonbinding commitments from prescribers, the employees are clearly exempt from the FLSA. Alternatively, if the company is unable to make that showing, the FLSA status of its sales employees remains open. To take full advantage of Christopher,then, companies should ensure that their training and evaluation of salespeople focus on obtaining commitments from prescribers rather than simply providing information. This should have little or no impact on the substance of interactions with physicians: To obtain a commitment, the sales representative must first provide information and, as the Court noted, any commitment is necessarily nonbinding. In future FLSA litigation, however, the training and evaluation materials will support the company's contention that sales employees are primarily focused on getting nonbinding commitments and, as a result, Christopher is controlling precedent and mandates a finding that the employees are exempt.
Caronia: An Opening Door to Off-Label Promotion
In Caronia, the Second Circuit overturned on First Amendment grounds the criminal conviction of a sales representative for off-label marketing, i.e.,marketing for indications other than those on the product label approved by the Food and Drug Administration (FDA). The decision casts doubt on the government's authority to regulate or criminalize the dissemination by pharmaceutical manufacturers and their employees of truthful information regarding the use of their products for unlabeled indications. This decision is only the first step in a process of determining the limitations that the First Amendment places on the FDA's regulation of off-label marketing.
The Food, Drug, and Cosmetic Act (FDCA) makes it a crime to "misbrand" a regulated pharmaceutical product, i.e., to sell it without "adequate directions for use." 21 U.S.C. § 352(f). Historically, convictions for misbranding have required proof that the manufacturer had a specific intent to misbrand the product, namely, that the defendant intended to sell the product for a use other than those for which it is labeled. While a manufacturer's promotional practices could provide evidence of intent, promotion for off-label use was not itself considered misbranding. Beginning in 2009, however, the FDA staked out a position that "[a]n approved drug that is marketed for an unapproved use (whether in labeling or not) is misbranded because the labeling of such drug does not include 'adequate directions for use.'" FDA Draft Guidance. This position has led to aggressive prosecutions of both companies and individuals for off-label marketing and produced a series of high-profile, high-dollar settlements.
Notably, while the FDCA prohibits manufacturers and their representatives from promoting—or, in most situations, discussing at all—off-label uses of their products, it does not restrict physicians' ability to prescribe drugs for off-label uses. For some products, most commonly in oncology, the majority of use is off-label. So, although physicians are permitted to, and frequently do, prescribe drugs for off-label uses—and, indeed, the FDA acknowledges that such uses are sometimes part of a medically recognized standard of care—manufacturers and their sales representatives are prohibited from discussing these uses with physicians, even when the physicians specifically request information.
In Caronia, the Second Circuit found that the FDA's blanket restrictions on off-label marketing violated the First Amendment. Quoting the Supreme Court's decision in IMS Health, Inc. v. Sorrell,131 S. Ct. 2653 (2011), the majority found that the "fear that [physicians, sophisticated and experienced customers,] would make bad decisions if given truthful information cannot justify content-based burdens on speech." As a result, the court concluded, "[t]he government's construction of the FDCA essentially legalizes the outcome—off-label use—but prohibits the free flow of information that would inform that outcome."
The Caronia decision by no means closes the book on the FDA's prohibition of off-label marketing. Caronia does, however, raise serious doubts about the FDA's authority to undertake enforcement actions against life-science companies for truthful marketing statements about off-label uses of their products. It would be premature for companies to alter their approach to off-label marketing at this time. Caronia is, after all, binding precedent in only one circuit and the FDA continues to aggressively prosecute off-label marketing, seeking criminal penalties against both life-sciences companies and their executives. Nevertheless, the Caronia decision, particularly read in light of recent Supreme Court decisions striking down limitations on corporate speech—specifically Sorrell and Citizens United v. Federal Election Commission,130 S. Ct. 876 (2010)—highlights the very real possibility that the FDA's near total prohibition on off-label marketing may be severely limited in the near future. While the government has elected not to seek Supreme Court review of Caronia, it is inevitable that the Supreme Court will eventually take up this issue.
At a minimum, companies should be sure that its representatives understand the implications of the Caronia decision, which has been widely discussed. If a company determines that Caronia warrants no current changes in its marketing approach, it should make sure this decision is clear to its representatives, who may have read news coverage of the opinion and may believe that off-label marketing is now permissible. Companies may also want to begin internal discussions and planning about how a broadening of permissible marketing communication would affect their strategies. Finally, companies whose products are widely used off label or who are already under investigation may want to consider proactive litigation—on the model of that by Par Pharmaceuticals in 2011, and currently pending in the U.S. District Court in Washington, D.C.—challenging the FDA's current limitations on off-label marketing on the basis of Sorrell and Caronia.
Keywords: litigation, health law, Fair Labor Standards Act, Food Drug and Cosmetic Act, life sciences, pharma, medical device, health care
Dylan J. Steinberg is an attorney at Hangley Aronchick Segal Pudlin & Schiller in Philadelphia, Pennsylvania.
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