The cheerleader, Robin Davidson, suffered permanent brain damage after falling off the top of a pyramid while practicing in Carmichael Auditorium.
Davidson sued the University through the N.C. Industrial Commission for $500,000 -- the maximum amount that can be awarded in lawsuits against the state.
Davidson's lawyers claimed the University should have provided the cheerleading squad with a trained coach to prevent injury.
The N.C. Industrial Commission is responsible for handling financial claims against state agencies like the University.
According to The Associated Press, the appeals court decision reverses an earlier commission ruling that UNC was not required to provide a coach or monitor the junior varsity squads' activities.
But UNC law Professor Charles Daye said the decision is not final and only requires the commission to rehear the case.
According to the AP, Hudson wrote that UNC and its employees "had an affirmative duty to exercise that degree of care which a reasonable and prudent person would exercise under the same or similar circumstances."
Daye said the decision is not a surprising one and will not have much effect on athletic policies if it is upheld. "All this means is that a university that sponsors a cheerleading squad must exercise reasonable care," he said. "It's the same responsibility anyone putting together a cheerleading squad would have."
University officials would not comment on the ruling and directed all questions to the state attorney general's office.