Supreme Court Update: Christopher v. SmithKline Beecham Corp. (11-204) and Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak (11-246)

June 25, 2012 Supreme Court Update

Greetings, Court fans!

With the end of June in sight, the Court's flurry of decisions continues. Today, the Court overturned most of Arizona's controversial immigration law, reaffirmed the right of corporations to make political contributions (after Montana blatantly refused to follow the Court's Citizens United decision), and found that juvenile homicide offenders cannot be sentenced automatically to life without the possibility of parole. We'll be back soon with full coverage of those decisions.

Today, however, we'll cover two decisions from last week: Christopher v. SmithKline Beecham Corp. (11-204), holding that pharmaceutical drug detailers are exempt employees under the Fair Labor Standards Act; and Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak (11-246), the winner of this year's most unusual case name award, holding that the federal government waived its sovereign immunity to a suit over lands it had acquired pursuant to the Indian Reorganization Act.

Christopher v. SmithKline Beecham Corp. (11-204) combined an interesting labor and employment issue with an equally interesting agency deference discussion. The Fair Labor Standards Act ("FLSA") ordinarily requires employers to pay overtime wages, but this requirement does not apply to certain exempt employees, including those working "in the capacity of outside salesman." The question for the Court was whether pharmaceutical detailers (aka drug reps) qualify as outside salesmen. The Department of Labor ("DOL") said no, and the Second Circuit deferred to DOL's interpretation. But the Ninth Circuit disagreed, and astonishingly (given that it's the Ninth Circuit), the Court agreed with it. Though the Justices split 5-4 on the merits, all nine found that DOL's evolving interpretation was subject to no deference.

FLSA does not define "outside salesman," leaving it to DOL to promulgate regulations doing so. FLSA does, however, define sale to "include[] any sale, exchange, contract to sell, consignment for sale, shipment for sale, or other disposition." DOL promulgated three regulations relevant to the issue. DOL's "general" regulation provides that outside salesman "shall mean any employee . . . [w]hose primary duty is . . . making sales . . . ." and "who is customarily and regularly engaged away from the employer's place of business in performing such primary duty." DOL's "sales" regulation defines sales to "include the transfer of title to tangible property, and in certain cases, of tangible and valuable evidence of intangible property." Finally, DOL's "promotion-work" regulation provides that promotion work that is "performed incidental to and in conjunction with an employee's own outside sales or solicitation is exempt work" whereas promotion work that is "incidental to sales made, or to be made, by someone else is not exempt outside sales work." DOL guidance also states that outside salesmen make their own sale whenever the employee "in some sense make[s] a sale." Both parties agreed that these regulations were validly promulgated, following notice and comment, and were subject to Chevron deference. But the three regulations apparently weren't adequate to resolve the issue, as the regulations remained ambiguous as applied to drug reps, causing DOL to weigh in with its interpretation of the regulations in amicus briefs, first in a 2009 Second Circuit case and then in other cases, including this one. In those amicus briefs, DOL took the position that "a ‘sale' for the purposes of the outside sales exemption requires a consummated transaction directly involving the employee for whom the exemption is sought." However, before the Supreme Court, DOL's position evolved. DOL dropped the amorphous "consummated transaction" test and instead argued 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." Petitioners and DOL argued that this latest interpretation of DOL's regulations was subject to controlling deference under Auer v. Robbins (1997), which held that an agency's interpretation of its own ambiguous regulation generally is subject to deference, even when espoused in a brief.

The Court unanimously disagreed, finding that Auer deference was not warranted here, where DOL's new position conflicted with its prior interpretation in the very same case, and where the interpretation does not appear to reflect DOL's "fair and considered judgment" given that it conflicts with FLSA's own definition of "sale," which expressly includes "consignment," a situation where title does not pass. (The majority also found compelling the fact that DOL had acquiesced in the industry's classification of drug reps as exempt for decades. DOL's new position would expose the industry to massive liability for conduct that occurred before DOL's current interpretation was announced.) Since the Court found Auer deference unwarranted, DOL's interpretation was due only the measure of deference "proportional to the ‘thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.'" Unsurprisingly, the Court found DOL's interpretation "quite unpersuasive." So, the Court had to conduct its own interpretation of FLSA and DOL's relevant regulations from scratch. This is where the majority and dissent parted ways.

The conservative wing, led by Justice Alito, found that the most reasonable reading of FLSA and DOL's regulations would include drug reps as outside salesmen. FLSA exempts those working in the "capacity" of outside salesman. The use of the term "capacity" suggests a functional, rather than formalistic, evaluation. Further, FLSA's definition of "sale" states what it "includes," indicating that the list is "illustrative, not exhaustive." And the list includes the broad catchall phrase "other disposition," which suggested to the majority that FLSA intended to capture industry specific variations in the methods of sale. Here, pharmaceutical drug reps are well-paid, work outside the company most of the time, are subject to little oversight and bear all of the traditional hallmarks of outside salesmen. It is the unique regulatory landscape that prohibits them from actually transferring title to drugs. Drug reps obtain nonbinding commitments from gatekeepers (doctors) who must prescribe the drugs. Under the regulatory scheme, this is the most they can do, and is the functional equivalent of making a sale.

Led by Justice Breyer, the dissent vigorously disagreed. In their view, the majority made several missteps. First, a drug rep's primary duty is not "making sales" (or the equivalent); it is the provision of information so that physicians will keep their company's drug in mind for a particular patient where the drug might be appropriate. Indeed, industry ethics rules emphasize the importance of the physician's "independence" in prescribing drugs. The drug rep merely provides information to doctors, which may (or may not) increase the likelihood that the doctors will prescribe the reps' drug to a patient, who may (or may not) then get the prescription filled from a pharmacist, who may (or may not) fill the prescription with the name-brand drug or (more likely) the generic version. It is the pharmacist that makes the ultimate sale, not the drug rep or even the doctor. Second, a 1940 DOL report distinguished between promotion men (not exempt) and salesmen (exempt), indicating that promotion men "pav[e] the way" for sales by others, frequently dealing "with [the] retailers who are not customers of [their] own employer but of [their] employer's customer," and they are "primarily interested in sales by the retailer, not to the retailer." That is exactly what is happening here: drug reps deal with doctors, who are not customers of pharmaceutical manufacturers, but have a relationship with the manufacturers' customers – patients. Finally, DOL's promotion-work regulation distinguishes promotional activities in support of one's own sales (exempt) from promotion work down to further sales by others (not exempt). Here, the drug reps promotional activities clearly further sales by others. Therefore, in the dissent's view, drug reps do not qualify as outside salesmen, notwithstanding industry practice to the contrary.

In Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak (11-246), the Court ruled 8-1 that the federal government had waived its sovereign immunity under the Administrative Procedures Act to a suit over land it had acquired pursuant to the Indian Reorganization Act ("IRA"). The government had acquired certain Michigan land and placed it in trust under § 465 of the IRA so that the Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians ("Band") could open a casino. A neighbor, David Patchak, sued, claiming that the government could not acquire the property for the Band under § 465 because the Band wasn't a federally recognized tribe in 1934 when Congress enacted IRA (despite a "long history," the Band won formal recognition only in 1999). Patchak didn't assert any claim to the property itself, but complained that allowing a casino near his own land would increase traffic and crime, reduce property values, and generally "destroy the lifestyle" he enjoyed. In essence, Patchak's suit sought to divest the government of title to the land so that the Band could not build its planned casino. The district court dismissed the suit without addressing the merits, concluding that Patchak lacked prudential standing to challenge the acquisition of the property. The D.C. Circuit reversed, and also rejected a claim by the government and the Band that sovereign immunity barred the suit, creating a conflict with three other circuits.

In an opinion penned by Justice Kagan and joined by seven of her colleagues, the Court sided with the D.C. Circuit. The Court first considered whether the Administrative Procedures Act waived the government's immunity from suit. The APA waives immunity from suits "seeking relief other than money damages and stating a claim that an agency or an officer or employee thereof acted or failed to act in an official capacity or under color of legal authority." But, under a carve-out, the APA's waiver does not apply "if any other statute that grants consent to suit expressly or impliedly forbids the relief which is sought." The government, along with the Band, contended that the Quiet Title Act ("QTA") is just such a statute. The QTA allows a plaintiff to assert an interest in real property that conflicts with an interest claimed by the U.S. government, but also contains an exception: the authorization to sue "does not apply to trust or restricted Indian lands." The government claimed that this limitation satisfied the APA carve-out and forbade Patchak's suit. The Court disagreed.

Patchak, it reasoned, was not really addressing the sort of claim of title that the QTA covered; in fact, while he wanted to strip the government of title to the land, Patchak himself did not claim any interest in the property at issue – the hallmark of a quiet title claim. Instead, Patchak simply claimed that by taking title the government violated a federal statute – "a garden-variety APA claim" to which the sovereign immunity waiver applies. The majority also rejected an alternative argument that Patchak lacked prudential standing because his interests were not in the "zone of interests" to be protected or regulated under the IRA provision authorizing the government's acquisition of property to provide land to tribes. According to the government and the Band, Patchak's claims went to the land's use, not its acquisition. The Court was not persuaded. Under previous case law, suit under the APA is foreclosed only when a plaintiff's "interests are so marginally related to or inconsistent with the purposes implicit in the statute that it cannot reasonably be assumed that Congress intended to permit the suit." Here, the IRA provision at issue is directed not only to land acquisition, but to land use. And so too was the government's acquisition, which from the outset was aimed at providing land for the Band's casino project. Patchak's interests thus fell within the zone protected by the statute, and he had standing to sue.

Justice Sotomayor dissented, alone. In her view, the Court's decision "sanctions an end-run" around the QTA's limitations to the government's waiver of sovereign immunity, allowing suit under the APA to challenge the government's title to and possession of any land held in trust for Indian tribes as long as a plaintiff does not assert a personal interest in the land, thus exposing the government to "costly and prolonged challenges" and creating "perverse incentives for private litigants." Justice Sotomayor noted that Patchak wanted to oust the government of title to the disputed land – the exact relief prohibited by the QTA. But because Patchak indisputably did not meet the conditions to sue under the QTA, he simply invoked the APA instead to avoid both the QTA's requirements and the government's immunity. She disagreed that the QTA does not extend beyond ordinary quiet title suits. And even if it was expressly so limited, in Justice Sotomayor's opinion, the QTA still would impliedly forbid relief. Thus, the APA immunity waiver would not apply.

We'll be back very soon with more as the end-of-Term onslaught continues.

Kim & Jenny

From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400