Reviewing the ALJ, Not the Agency, and Recognizing “But-For” Prejudice in Two‑Applicant CON Contests

Pinnacle Health Services of N.C., LLC v. N.C. Department of Health & Human Services (N.C. Oct. 17, 2025)

Introduction

The North Carolina Supreme Court’s decision in Pinnacle Health Services of North Carolina, LLC d/b/a Cardinal Points Imaging of the Carolinas Wake Forest, and Outpatient Imaging Affiliates, LLC v. N.C. Department of Health and Human Services, Division of Health Service Regulation, Health Care Planning & Certificate of Need Section, with Duke University Health System, Inc. as intervenor, reorients two foundational aspects of North Carolina administrative and Certificate of Need (CON) law.

First, it emphatically confirms that in Article 3 contested cases the Administrative Law Judge (ALJ)—not the agency—is the decisionmaker whose findings and conclusions are reviewed on appeal, and that “due regard” to agency expertise is not blind deference. Second, it articulates a new, clear rule for “substantial prejudice” under the Administrative Procedure Act (APA) in a narrow but important subset of CON disputes: where two qualified applicants compete for a single CON, the denied applicant is substantially prejudiced because, but for the denial, the approval would have gone to that applicant—and concrete economic harms flowing from that result suffice.

The case arises from the 2021 State Medical Facilities Plan (SMFP) identifying need for one additional fixed MRI scanner in Wake County. Both Pinnacle and Duke applied. The agency approved Duke after a comparative review; Pinnacle petitioned for a contested case. The ALJ reversed the agency’s comparative analysis for legal and methodological errors and awarded the CON to Pinnacle, also finding substantial prejudice to Pinnacle. A divided Court of Appeals affirmed based on briefing defects. On further appellate review, the Supreme Court affirms in part and reverses in part, ultimately leaving the ALJ’s award to Pinnacle intact.

Summary of the Opinion

• The Court holds that, after the 2011 APA amendments, judicial review in Article 3 contested cases focuses on the ALJ’s final decision—not the agency’s initial decision. ALJs must give “due regard” to an agency’s demonstrated expertise, but courts owe deference to the ALJ’s fact-finding. Deference to agency views is inappropriate where the record shows subjective, error-ridden, or procedurally aberrant determinations.
• Under the “whole record” standard, appellants must challenge specific findings of fact in the ALJ’s final decision; unchallenged findings are binding. Courts will not scour the record for error sua sponte.
• Applying those rules, the Court affirms the ALJ’s reversal of the agency’s comparative analysis because appellants failed to specifically challenge the ALJ’s findings on that score.
• The Court reverses the Court of Appeals’ procedural holding on substantial prejudice (finding that appellants did adequately challenge the ALJ’s prejudice findings), but on the merits announces a new rule: in a two-applicant, one-CON contest between qualified applicants, the denied applicant is substantially prejudiced—the but-for denial demonstrates prejudice, and concrete economic impacts (here, projected $400,000 annual savings lost and $97,000 annual net income foregone) confirm it. The ALJ’s award of the CON to Pinnacle is affirmed.

Analysis

Precedents Cited and Their Role

The Court weaves together core APA precedents to anchor its holdings:

• Sound Rivers, Inc. v. N.C. Department of Environmental Quality, 385 N.C. 1 (2023): Reinforces that, post‑2011, ALJs issue final decisions in Article 3 contested cases, and those decisions—not agency determinations—are the focus of judicial review. The Court leverages Sound Rivers to reject appellants’ reliance on pre‑2011 case law suggesting courts review the agency’s decision in the first instance.
• N.C. Dep’t of Env’t & Natural Resources v. Carroll, 358 N.C. 649 (2004), and Watkins State Bd. of Dental Examiners, 358 N.C. 190 (2004): Clarify the bifurcated scope of review—de novo for errors of law under N.C.G.S. § 150B‑51(b)(1)-(4) and “whole record” review for substantial evidence/arbitrary and capricious challenges under (b)(5)-(6). Pinnacle applies the whole record test where appropriate and reiterates that it is not a license to reweigh evidence.
• State ex rel. Utilities Commission v. Bird Oil Co., 302 N.C. 14 (1981): The “nature of the contended error dictates the applicable scope of review.” The Court uses this to sort issues between de novo and whole record review tracks.
• N.C. Dep’t of Public Safety v. Ledford, 247 N.C. App. 266 (2016): Recognizes the “high degree of deference” owed to the ALJ as factfinder on witness credibility, evidentiary weight, and inference drawing.
• N.C. State Bar v. Talford, 356 N.C. 626 (2003): Whole record review requires courts to consider evidence that both supports and detracts from the decision under review.
• Brewington v. N.C. Dep’t of Public Safety, 254 N.C. App. 1 (2017), and Rittelmeyer v. University of North Carolina, 252 N.C. App. 340 (2017): Establish that unchallenged findings of fact are conclusively binding on appeal and the appellant bears the burden to show error.
• Parkway Urology, P.A. v. N.C. DHHS, 205 N.C. App. 529 (2010); CaroMont Health, Inc. v. N.C. DHHS, 231 N.C. App. 1 (2013); Cumberland County Hospital System, Inc. v. N.C. DHHS, 237 N.C. App. 113 (2014); Blue Ridge Healthcare Hospitals, Inc. v. N.C. DHHS, 255 N.C. App. 451 (2017): A line of Court of Appeals decisions holding that “harm from normal competition” is insufficient to establish substantial prejudice. Pinnacle distinguishes and limits this doctrine in the specific two‑applicant context.
• Anders v. California, 386 U.S. 738 (1967): Cited by analogy to reject the notion that appellate courts must search the record for error absent targeted challenges; Pinnacle declines such an approach in civil APA review.

Statutes are central: N.C.G.S. § 150B‑34(a) (ALJ’s final decision; “due regard” to agency expertise), § 150B‑51(b)-(c) (standards and scope of judicial review), § 150B‑23(a) (contested case elements and substantial prejudice), and § 131E‑183 (CON review criteria). The Court also flags but does not resolve an ambiguity in § 150B‑51(b) over the term “petitioner.”

Legal Reasoning

1) Which decision is reviewed on appeal? The ALJ’s—full stop.

The Court rejects appellants’ argument that courts should review the agency’s comparative decision under the whole record test and grant the agency deference. Post‑2011, the ALJ’s decision is the “final decision” in Article 3 contested cases (including CON appeals under N.C.G.S. § 131E‑188(a)), and it is the ALJ’s findings and conclusions—not the agency’s—that are evaluated under § 150B‑51. ALJs must accord “due regard” to agency expertise in specialized matters, but this is a calibrated requirement, not a command to rubber‑stamp. Where the agency’s analysis is infected by mathematical errors, subjective views, or unexplained departures from established practices and the statutory purpose of the CON Act, there is no “specialized knowledge” to which deference is owed.

In this case, the ALJ found multiple methodological and substantive defects in the project analyst’s comparative review and concluded no principled “determining principle” was applied. That finding undercut any claim to deference. The Supreme Court endorses the ALJ’s approach and admonishes reliance on pre‑2011 cases suggesting direct judicial deference to agency final decisions in Article 3 matters.

2) Whole record review requires targeted challenges to the ALJ’s findings.

The Court clarifies a recurring misstep in administrative appeals: under the whole record test, the appellant bears the burden to identify and challenge specific findings of fact in the ALJ’s final decision as unsupported by substantial evidence. Unchallenged findings are binding. A court will not sift an administrative record sua sponte to construct arguments (rejecting an “Anders-like” search for reversible error).

Applied here, appellants advanced broad, conclusory attacks on the ALJ’s reversal of the agency’s comparative analysis but failed to pinpoint specific factual findings for review. Consequently, those findings stand, and with them the ALJ’s comparative determination. The Court affirms the Court of Appeals on this point and declines appellants’ late attempt to invoke de novo review for what are fact-intensive challenges governed by § 150B‑51(b)(5)-(6).

3) “Substantial prejudice” in two‑applicant, one‑CON contests.

Turning to the APA’s substantial prejudice requirement (N.C.G.S. § 150B‑23(a)), the Court recognizes that prior Court of Appeals authority generally disfavors claims that mere “harm from normal competition” or generalized economic loss constitutes substantial prejudice. Pinnacle narrows that doctrine: where two qualified applicants compete for a single CON and only one can be approved, the denied applicant is inherently prejudiced because, but for the agency’s denial, the approval would have gone to that applicant. If the record also shows concrete, quantifiable impacts traceable to that denial, the requirement is met.

Here, the ALJ found that Pinnacle’s denial prevented it from realizing approximately $400,000 in annual savings (by avoiding mobile MRI costs at the Wake Forest site) and about $97,000 in annual net income. The Supreme Court holds those harms sufficiently specific and directly attributable in this two‑applicant scenario. Although the Court of Appeals mistakenly treated appellants’ challenges to prejudice as procedurally defaulted, the Supreme Court reaches the merits and rejects the challenges.

Importantly, the Court confines its ruling to the “limited factual scenario” presented and notes pending petitions (Chesapeake Diagnostic Imaging Centers; MH Mission Hospital) that may provide opportunities to address the doctrine more fully in other contexts (e.g., more than two applicants).

Impact

Immediate effects on CON litigation

• ALJ-centered appeals: Practitioners must frame appellate issues around the ALJ’s final decision. Arguments premised on direct judicial deference to the agency’s original decision (and pre‑2011 APA cases) are non-starters.
• Preservation via specificity: Appellants must isolate and challenge specific findings of fact in the ALJ’s order to obtain whole record review. Global challenges to “the decision” will be deemed insufficient.
• Documented agency methodology is essential: Agencies must ensure comparative reviews are conducted consistently with established practice, avoid arithmetic or methodological errors, and tie their analysis to statutory purposes (e.g., avoiding geographic maldistribution). Unexplained departures invite reversal and negate calls for deference.
• Substantial prejudice clarified for two‑applicant contests: Denied applicants in a two‑qualified‑applicant competition can establish substantial prejudice by demonstrating but‑for denial and concrete, attributable harms. This lowers the bar for access to contested case review in such settings.

Broader administrative law implications

• “Due regard” is not blind deference: Across Article 3 contested cases, ALJs must consider agency expertise, but reviewing courts will uphold ALJs who reject agency conclusions shown to be subjective, error‑laden, or inconsistent with statutory policy or agency practice.
• Appellate briefing discipline: Pinnacle underscores the hazards of relying on outdated precedent and of failing to tailor challenges to the ALJ’s findings. The Court’s description of appellants’ position as bordering on “frivolous” is a cautionary note.
• Open statutory questions flagged: The Court notes ambiguity in N.C.G.S. § 150B‑51(b) regarding who the “petitioner” is for purposes of prejudice on judicial review (the original OAH petitioner vs. the judicial appellant) and leaves resolution for another day or for legislative clarification.

Complex Concepts Simplified

• Certificate of Need (CON): A regulatory regime requiring state approval before new healthcare services/facilities are developed to prevent duplicative capacity and control costs. The SMFP sets need, and competing applications are comparatively reviewed under statutory and regulatory criteria.
• Article 3 contested case: A trial-type proceeding before an ALJ in the Office of Administrative Hearings (OAH). Since 2011, the ALJ issues the final decision (for Article 3 matters), which courts review under the APA.
• “Due regard” to agency expertise: The ALJ must account for an agency’s specialized knowledge on technical matters. But deference only attaches where the agency’s analysis reflects that expertise and is consistent, reasoned, and error-free.
• Whole record review: The appellate court examines all evidence that supports and detracts from the ALJ’s decision to determine whether “substantial evidence”—relevant evidence a reasonable mind might accept—supports the decision. The court does not reweigh evidence or make credibility determinations. Appellants must target specific ALJ findings.
• Substantial prejudice (APA § 150B‑23(a)): A threshold requirement for contested case standing and relief, requiring a showing that the agency’s action significantly harmed the petitioner’s rights. In two‑applicant CON contests, the denied applicant shows prejudice if the record demonstrates that but for the denial, the CON would have been awarded to that applicant, coupled with specific, attributable economic harms.

What the Court Did Not Decide

• Multi‑applicant contests: The new substantial prejudice rule is expressly limited to cases with only two qualified applicants competing for a single CON. The contours of prejudice in multi‑applicant competitions remain open.
• § 150B‑51(b) “petitioner” ambiguity: The Court flags but does not resolve whether “petitioner” refers to the OAH petitioner or the party seeking judicial review in the appellate courts.
• Agency appellate standing in this case: The Court proceeds on the parties’ agreement that the Agency’s appeal is properly before it and treats any challenge as waived.

Practice Pointers

• For appellants: Build your appeal around specific, numbered challenges to the ALJ’s findings and conclusions; identify which § 150B‑51(b) ground applies and argue the corresponding standard under § 150B‑51(c). Avoid generic “the agency got it right” arguments.
• For agencies: Standardize and document comparative review methodologies; avoid arithmetic errors; explicitly tie factor analysis to statutory purposes (e.g., avoiding geographic maldistribution) and the SMFP; explain any departures from past practice.
• For petitioners in two‑applicant CON contests: Couple your but‑for theory with concrete, traceable economic impacts (cost savings foregone, projected net income, capacity utilization effects) to satisfy substantial prejudice.

Conclusion

Pinnacle Health Services delivers three lasting directives for North Carolina administrative and CON litigation. First, in Article 3 contested cases, courts review the ALJ’s final decision—not the agency’s—and accord the ALJ traditional fact‑finder deference, with “due regard” to, but not automatic acceptance of, agency expertise. Second, the whole record test is a disciplined tool: appellants must specifically attack the ALJ’s findings or those findings are binding. Third, in the discrete setting of a two‑applicant, one‑CON contest between qualified providers, the denied applicant satisfies the APA’s substantial prejudice requirement because the denial is the but‑for cause of losing the sole award, and specific, attributable economic harm confirms the prejudice.

By clarifying these rules, the Court strengthens the integrity and transparency of agency decision‑making, reaffirms the centrality of the ALJ’s role post‑2011 amendments, and ensures that genuine comparative errors in CON reviews can be corrected without procedural obstacles. Future cases may refine how substantial prejudice operates in multi‑applicant contests, but Pinnacle’s core lessons on review structure and briefing rigor will reverberate across North Carolina administrative law.