## Facts

- Kenneth L. Nalley, Jr. applied for Disability Insurance Benefits (Title II) and Supplemental Security Income (Title XVI) on June 19, 1996.
- Nalley alleged disability largely stemming from a severe head injury after being beaten with a bat, leaving him blind in one eye and deaf in one ear, paralyzed and confined to a wheelchair, with a seizure disorder and a history of central nervous system trauma and surgeries.
- Nalley submitted medical evidence documenting side effects from prescribed medications, including drowsiness, nausea, and an inability to concentrate.
- His applications were denied initially and on reconsideration, and he requested a hearing before an Administrative Law Judge (ALJ).
- The ALJ (Thomas M. Donahue) held a hearing on August 29, 1997 and issued an unfavorable decision on October 21, 1997.
- The ALJ found Nalley could not perform past relevant work but concluded at step five that Nalley had the residual functional capacity to perform other jobs existing in significant numbers in the national economy.
- The ALJ relied on a vocational expert (VE) answer to a hypothetical question that did not include all limitations supported by the record, including the side effects of Nalley’s medications and limitations from partial loss of sight and hearing.
- On cross-examination, when the VE was asked to assume the medication side effects described in the medical evidence, the VE testified that competitive employment would not be possible.
- The ALJ also asked the VE to assume additional limitations based on two impairments the ALJ believed he observed during the hearing, even though those impairments were not established by the medical evidence.
- The Appeals Council denied review on December 11, 1998, making the ALJ’s decision the Commissioner’s final decision.
- Nalley sought judicial review in the United States District Court for the Southern District of Iowa under 42 U.S.C. § 405(g).

## Issues

1. Whether substantial evidence supported the Commissioner’s step-five denial where the ALJ relied on VE testimony based on a hypothetical that omitted medically supported limitations, including medication side effects and sensory deficits.
2. Whether the ALJ erred by relying on hearing observations and consultative opinions not based on review of the full medical record.
3. Whether the proper remedy was a remand for further proceedings or a remand for calculation and award of benefits.

## Decision

- The district court reversed the Commissioner’s decision as not supported by substantial evidence on the record as a whole.
- The court held the VE testimony could not support the step-five finding because the ALJ’s hypothetical failed to include established limitations, including medication side effects and limits from Nalley’s impaired vision and hearing.
- The court disapproved of the ALJ’s reliance on impairments the ALJ claimed to observe at the hearing without medical support, while excluding record-supported limitations.
- The court also faulted reliance on consultative assessments formed without review of all available medical records.
- Because the record and the VE’s testimony under a complete set of limitations showed Nalley could not perform competitive work, the court remanded for calculation and award of benefits (not for additional fact-finding).

## Legal Principles

- At step five, VE testimony is substantial evidence only if the hypothetical question fully and fairly includes all impairments and functional limits supported by the record.
- Medication side effects that are supported by medical evidence must be addressed in the RFC assessment and included in any VE hypothetical used to deny benefits.
- An ALJ may not substitute lay observations for medical evidence when assessing the existence or severity of impairments or functional limitations.
- When the agency sends a claimant for a consultative examination, the examiner should review all available medical records; opinions formed without that review may be unreliable.
- A court may reverse and remand for an award of benefits when the evidence compels a finding of disability and further administrative proceedings would serve no useful purpose.

## Conclusion

Nalley v. Apfel held that the Commissioner failed to carry the step-five burden because the ALJ relied on VE testimony driven by an incomplete hypothetical that omitted record-supported limitations, particularly medication side effects and sensory deficits, and instead injected unsupported limitations based on hearing observations; given the VE’s testimony that competitive work would not be possible when the supported limits were included, the court reversed and remanded for calculation and payment of benefits.


Nalley v. Apfel, 100 F. Supp. 2d 947 (2000)