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The Age of ALJ Final Decisions has dawned for many clients whose businesses involve regulatory actions or decisions by North Carolina administrative agencies. As part of the General Assembly’s regulatory reforms in the 2011 session, legislators made contested case decisions of administrative law judges final, eliminating the final agency decision step of the process. Under the law commonly known as the Regulatory Reform Act (Session Law 2011-398, 2011 SB 781), beginning with contested cases filed on or after January 1, 2012*, the decisions of administrative law judges (ALJs) will now be final, subject to any further appeal to court. This change applies to contested cases challenging decisions or actions of regulatory agencies subject to the North Carolina Administrative Procedure Act (APA), with the limited exception of cases involving decisions of professional and occupational licensing boards.

The fundamental questions in contested cases appealing regulatory decisions will be what they always have been: whether the petitioner has met its burden of demonstrating that the challenged agency action or decision deprived the petitioner of property, ordered it to pay a fine or civil penalty, or otherwise substantially prejudiced its rights, and that the agency erred in one or more of the ways enumerated by statute in N.C. Gen. Stat. § 150B-23(a). The contested case hearing will continue to be the fact-finding proceeding of record where evidence is presented, witness credibility is evaluated and determined, and facts are established.

Likewise, the ALJ’s role in presiding over the contested case will remain the same. The major reform is that the decision of the ALJ who fulfills this fact-finder role will now be the final decision in the contested case. Agencies will no longer have an opportunity at the final decision stage to reverse unfavorable ALJ decisions or bring them in line with the agencies’ perspective on the factual circumstances or law at issue.

Only time will tell whether the dawning of this new ALJ final decision era will bring improved harmony and understanding between agencies and the individuals and entities they regulate. What seems almost certain is that the move to ALJ final decisions will trigger a corresponding shift in the course and tactics of contested cases. There will likely be a heightened focus on evidence relating to agency expertise, and the correctness of, and bases for, the agency’s interpretation of the controlling law. The fact that the agency will no longer get a second bite at the decision apple will make it important for parties on both sides of the case to develop and present before the ALJ persuasive evidence regarding whether and how the agency decision being challenged fits within the law as well as any supporting agency expertise or lack thereof.

Due Regard to the Agency’s Demonstrated Knowledge and Expertise. A long-standing provision of the APA which will now garner more attention is the requirement that the ALJ give “due regard to the demonstrated knowledge and expertise of the agency with respect to facts and inferences within the specialized knowledge of the agency.” N.C. Gen. Stat. § 150B-34(a). Under the prior law which gave Agencies final decision authority, parties gave limited attention to the ALJ’s duty to give “due regard” to the agency’s demonstrated knowledge and expertise. Consequently, this provision has been the subject of limited judicial construction by our State’s courts. However, the brighter spotlight on this due regard provision resulting from the move to ALJ final decisions will likely lead to further consideration and gloss of this provision by our courts.

There is no provision of the APA or any other statute which speaks to how to establish an agency’s demonstrated knowledge or expertise, or lack thereof, as part of the record in a contested case. Of course, the guidepost is the standard established in N.C. Gen. Stat. § 150B-34(a), which means that the agency’s position or approach is entitled to appropriate regard by the ALJ concerning facts and inferences within the specialized knowledge of the agency” where there isdemonstrated knowledge and expertise of the agency”. N.C. Gen. Stat. § 150B-34(a) (emphasis added).

Parties will want to lay the foundation in the official record for their contentions regarding what type of consideration the ALJ should give to the agency’s position concerning the facts underlying the decision or action at issue in a contested case. Any specialized knowledge or expertise of the Agency, including, but not limited to support for the agency’s interpretation of controlling statutes and regulations, should be specifically established and addressed in the official record for the case. Likewise, any contentions against the agency’s position should be established through record evidence.

The statutory mandate for an ALJ to give due regard to an agency’s demonstrated knowledge and expertise is consistent with the fundamental precept which has long been recognized by North Carolina’s appellate courts that an agency’s knowledge or expertise should be accorded appropriate consideration and weight on judicial review. However, it is important to distinguish regard or deference to an agency’s application of the law in the context of judicial review where a court is sitting in an appellate capacity, from consideration of an agency’s knowledge or expertise in the context of an evidentiary contested case where the ALJ sits as the trier of fact.

Simplified Contested Case Process. Because the ALJ’s decision will be final, the contested case process should be simpler and more efficient. Procedural and substantive legal issues involving the agency final decision-maker’s acceptance or rejection of the ALJ’s decision and supporting findings and conclusions which historically have been an inherent part of the contested case process, will no longer exist. Instead, any issues arising from differences between the ALJ’s decision and the agency’s position, will be addressed on judicial review or appeal from the ALJ’s decision. Appeals involving tension or differences between the ALJ’s decision and the agency’s position will likely lead to further development of appellate case law regarding a reviewing court’s appropriate consideration of both the ALJ’s determinations – flowing from his or her unique role as the fact-finder in the contested case, and the agency’s position regarding the appropriate outcome – stemming from its delegated responsibility to construe and implement the controlling statutes and regulations.

Challenges on the Horizon? Since before the Regulatory Reform Act became law, there have been rumblings of potential legal actions challenging the lawfulness of ALJ final decisions. A number of agency advocates have suggested that it might be unconstitutional to allow ALJs who are outside the agency delegated with authority over a given area of law, to render final decisions in contested cases. Others in defense of the new law have maintained there is no constitutional bar to giving independent ALJs final decision authority.

To date, the one case that has been filed is based upon a limited theory. On February 8th, Piedmont Behavioral Healthcare (PBH), a multi-county area mental health, development disabilities and substance abuse authority, initiated a federal lawsuit in the Eastern District of North Carolina seeking temporary and permanent injunctions requiring the Acting Secretary of the N.C. Department of Health and Human Services to render final decisions in appeals involving eligibility for certain Medicaid services and prohibiting ALJs in the N.C. Office of Administrative Hearings (OAH) from making final decisions in such cases. According to its Complaint, PBH is seeking to preserve the final decision authority of N.C. DHHS in these Medicaid appeals unless and until the U.S. Department of Health and Human Services waives the requirement under the federal Social Security Act that a single State agency must administer the State’s Medicaid program.

In their March 1st responses opposing the preliminary injunctive relief sought by PBH, the DHHS Acting Secretary and the Director of OAH argued that PBH failed to establish the necessary elements to support a preliminary injunction. Among other things, these responsive arguments included: (1) PBH lacks standing to litigate its claims because its alleged harm is conjectural and hypothetical and it has not suffered any imminent, concrete injury; (2) PBH’s ability to serve Medicaid recipients and receive payment for that service has not been impacted by the change in the law, and its position is the same regardless of which entity makes the final decision in Medicaid recipient appeals; (3) PBH failed to exhaust its administrative remedies in that it did not challenge rules promulgated by OAH to implement the statutory change in the contested case process; and (4) it is in the public interest to allow the amended contested case process to continue in effect and to allow the federal Centers for Medicare and Medicaid Services to proceed with its review and decision of the requested waiver of the single State agency requirements for final administrative decisions.

It remains to be seen whether any other legal challenges to the new ALJ final decision authority, perhaps on broader constitutional grounds, may be lurking around the corner.

* For cases concerning agency decisions involving certain environmental programs established under federal legislation, the amended contested case process will take effect when the United States Environmental Protection Agency approves OAH as an agency responsible for administering those programs, or June 15, 2012, whichever occurs first.

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