                           NOT FOR PUBLICATION                            FILED
                    UNITED STATES COURT OF APPEALS                         JUN 27 2017
                                                                      MOLLY C. DWYER, CLERK
                                                                        U.S. COURT OF APPEALS
                           FOR THE NINTH CIRCUIT

ANGELIC RENEE PALLESI,                          No.    15-15943

                Plaintiff-Appellant,            D.C. No. 1:13-cv-01813-SMS

 v.
                                                MEMORANDUM*
NANCY A. BERRYHILL, Acting
Commissioner of Social Security,

                Defendant-Appellee.

                   Appeal from the United States District Court
                       for the Eastern District of California
                  Sandra M. Snyder, Magistrate Judge, Presiding

                       Argued and Submitted June 15, 2017
                            San Francisco, California

Before: THOMAS, Chief Judge, FRIEDLAND, Circuit Judge, and CARNEY,**
District Judge.

      Angelic Pallesi appeals the district court’s order affirming the denial of her

application for disability insurance and supplemental security income benefits. We

reverse and remand for further administrative proceedings.


      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
             The Honorable Cormac J. Carney, United States District Judge for the
Central District of California, sitting by designation.
                                          I

      Pallesi, who alleged disability based on depression and anxiety, argued that

the Administrative Law Judge erred by improperly discounting the opinion of Dr.

Guzzetta, her treating psychiatrist. “Because treating physicians are employed to

cure and thus have a greater opportunity to know and observe the patient as an

individual, their opinions are given greater weight than the opinions of other

physicians.” Smolen v. Chater, 80 F.3d 1273, 1285 (9th Cir. 1996). If another

doctor contradicts the treating physician’s opinion, the ALJ must give specific and

legitimate reasons supported by substantial evidence in the record to reject the

treating physician’s opinion. Reddick v. Chater, 157 F.3d 715, 725 (9th Cir. 1998).

      Dr. Guzzetta opined that Pallesi could follow one- or two-step instructions,

could only focus for thirty minutes at a time, and could not deal with stress. The

ALJ discounted this opinion because she deemed it inconsistent with the medical

record and with Dr. Guzzetta’s own notes of normal mental status exams.

Substantial evidence does not support these reasons.

      First, although Dr. Guzzetta’s treatment notes consistently reflect normal

mental status exam results, the record makes clear that this portion of Dr.

Guzzetta’s notes was pre-populated to reflect a normal mental status exam and that

Dr. Guzzetta did not change these fields, even when they did not reflect Pallesi’s

actual condition or he had no opportunity to observe her. And at least one of Dr.


                                          2
Guzzetta’s treatment notes reflecting normal mental status contrasted starkly with

notes from treating therapist Ms. Powers—a provider the ALJ totally failed to

mention—from the previous day that showed a markedly abnormal mental status

exam. The “Mental Status Exam” portion of Dr. Guzzetta’s notes thus is not

substantial evidence.

      Second, although Dr. Holloway and Dr. Luu recorded some normal or

mostly normal mental status exams, “it is error for an ALJ to pick out a few

isolated instances of improvement over a period of months . . . and to treat them as

a basis for concluding a claimant is capable of working.” Garrison v. Colvin, 759

F.3d 995, 1017 (9th Cir. 2014). Viewed as a whole, treatment notes from Dr.

Holloway and Dr. Luu are consistent with Dr. Guzzetta’s opinion of Pallesi’s

limitations.

      Finally, the opinions of non-examining physicians Drs. Fair and Goldberg

that Pallesi would be capable of simple, routine work by November 2011 are not

substantial evidence. We have previously explained that “[t]he opinion of a

nonexamining medical advisor cannot by itself constitute substantial evidence that

justifies the rejection of the opinion of an examining or treating physician.”

Morgan v. Comm’r of Soc. Sec. Admin., 169 F.3d 595, 602 (9th Cir. 1999).

Because other record evidence does not support their opinions, their opinions are

not substantial evidence as a matter of law. In addition, the ALJ gave great weight


                                          3
to what she characterized as their determination that Pallesi “could perform simple

and routine work on a consistent basis.” But those doctors never found that Pallesi

was actually capable of such work. Rather, on the page of the record that the ALJ

cited, Dr. Fair projected that she would be capable of such work by November

2011 if she continued mental health treatment. Dr. Fair’s and Dr. Goldberg’s

predictions that Pallesi’s condition would improve and that she would be able to

perform simple, routine tasks within a year cannot be substantial evidence when

later treatment notes from Drs. Holloway and Luu show that her condition did not,

in fact, improve as they had anticipated it would.

                                         II

      The ALJ’s error in improperly discounting Dr. Guzzetta’s opinion was not

harmless. If the ALJ had not improperly discounted Dr. Guzzetta’s opinion (and

Ms. Powers’s), she may have assigned a residual functional capacity (RFC) limited

to one- or two-step tasks.1 Such an RFC would be inconsistent with the jobs in the

ALJ’s opinion, all of which required Level Two reasoning. See Rounds v. Comm’r


1
  Dr. Guzzetta’s opinion does not require an RFC limited to one- or two-step
instructions; he opined that she was capable of carrying out one- or two-step
instructions but not capable of carrying out “an extensive variety of technical
and/or complex job instructions.” His opinion thus leaves open the possibility that
an RFC encompassing Level Two reasoning would be appropriate. For this
reason, we remand for further proceedings rather than award benefits. See
Treichler v. Comm’r of Soc. Sec. Admin., 775 F.3d 1090, 1101 (9th Cir. 2014)
(observing that further administrative proceedings are useful where there is a need
to resolve ambiguities).

                                          4
Soc. Sec. Admin., 807 F.3d 996, 1003 (9th Cir. 2015). As a result, the error was

not “inconsequential” to the outcome of the case. Molina v. Astrue, 674 F.3d 1104,

1115 (9th Cir. 2012).

      The Commissioner contends that Pallesi waived this argument. But we have

recognized an exception to our normal waiver rules “when a new issue arises while

appeal is pending because of a change in the law.” Greger v. Barnhart, 464 F.3d

968, 973 (9th Cir. 2006) (quoting Bolker v. C.I.R., 760 F.2d 1039, 1042 (9th Cir.

1985)). In Rounds, which was issued after the district court had already decided

this case, we addressed for the first time whether a limitation to one- or two-step

tasks was consistent with Level Two reasoning. See 807 F.3d at 1003-04 & n.6.

Pallesi’s argument on harmlessness is excepted from waiver because it is based on

Rounds.

                                         III

      Because substantial evidence does not support the ALJ’s weighing of Dr.

Guzzetta’s opinion and because this error was not harmless, we REVERSE and

REMAND for further proceedings.2


2
 We deny Pallesi’s motion to remand pursuant to sentence six of 42 U.S.C.
§ 405(g). The only new evidence that Pallesi identified that relates to the time
period at issue in this appeal is a medical opinion from treating psychiatrist Dr.
Luu that she submitted in her subsequent application for benefits. Pallesi offered
no adequate reason why she could not have obtained Dr. Luu’s opinion while this
case was still pending before the Social Security Administration, and she thus has
not shown good cause as required by § 405(g).

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