Continuing Activity in Application of California’s Corporate Practice of Medicine Prohibition

The first half of 2026 has been an eventful period in the application of California’s long-standing prohibition against the corporate practice of medicine.  Specifically:

• Effective January 2026, as we previously discussed here, the California legislature enacted SB-351, statutorily adopting the corporate practice prohibition in the context of private equity group and hedge fund investment in California physician and dental practices. 
• In March 2026, California Attorney General Rob Bonta (the California AG) filed an amicus curiae brief in the pending appellate case Art Center Holdings, Inc. et al. v. WCE CA Art, LLC, et al., asserting that a private equity-backed management services organization (MSO) maintained improper control of a physician practice. 
• In May 2026, the California AG announced a settlement with Aspen Dental Management, Inc. (Aspen Dental) alleging corporate practice of dentistry and false advertising violations, resulting in $2 million in penalties, $300,000 in restitution, and injunctive terms. 
• Most recently, on June 26, 2026, the California AG announced a settlement with Carbon Health Technologies, Inc. (Carbon Health), its affiliated professional medical corporations (PCs), and co-founder and former CEO, imposing $4.5 million in combined penalties and injunctive relief regarding alleged corporate practice of medicine, deceptive advertising, and improper patient billing practice claims.   

The Issue

Since the early 20th century and codified into law in 1980, California has maintained a strict prohibition against lay or unlicensed entities engaging in the practice of medicine and other clinical professions.  From a public policy perspective, the goal of the early cases and law was to protect patients from the commercial exploitation of medicine and similar disciplines.  For decades, the “friendly PC” or MSO-PC model, the purpose  of which is to preserve professional and clinical autonomy, has been deemed permissible and utilized to address the corporate practice prohibition while allowing for much-needed investment and back-office support. Pursuant to the model, unlicensed entities provide non-clinical administrative and operational support services (often on an exclusive basis) to the PC for a fee, while the PC solely controls and provides clinical services to patients.

The friendly PC model is at issue in the Art Center Holdings case and the Aspen Dental and Carbon Health settlements.  Notably, each of these matters contains friendly PC provisions that are atypical and arguably allow the MSO to exercise undue control over the PC.  For example, Aspen Dental improperly restricted the manner in which PC clinicians could communicate with patients, directed the laboratories that the PC could utilize, and determined  compensation for PC clinicians.  Similarly, Carbon Health had complete authority over the maintenance and use of patient medical records, the selection of medical equipment, and the hiring and firing of PC clinicians.  This degree of MSO control and interference with the clinical operations of the PC has been widely and uniformly viewed as violative of the corporate practice prohibition.

Importantly, however, in each of these matters, the California AG has also focused on a friendly PC provision that is common in these arrangements – the ability of the MSO to direct the transfer of ownership in the PC. Given the significant capital expended by the MSO in assisting with the development of the PC, the physician-owner(s) of the PC typically enter into a “succession” or “share transfer” agreement.  Pursuant to these agreements, the physician-owner agrees to transfer the shares of stock of the PC to another MSO-selected physician upon the occurrence of certain triggering events, including the physician-owner’s death or disability, loss of license to practice medicine, or felony conviction. Further, succession/share transfer agreements often also include triggering events relating to the physician-owner transferring PC stock without the MSO’s approval or termination of the underlying administrative services agreement or other arrangements between the MSO and PC in certain instances.

• In its Art Center Holdings amicus brief, the California AG argued that where an agreement gives an unlicensed entity the right to replace the physician-owner of a PC with a different physician of the unlicensed corporation's choice, the corporation effectively owns and controls all aspects of the PC. 
• The Carbon Health settlement permanently enjoins the defendants from granting the MSO any ownership interest in a PC, including through an assignable option agreement granting the MSO the right to acquire the PC ownership interest for its own account. 

Taken together, the amicus brief and the settlement demonstrate the California AG’s unfavorable view of these very common arrangements. 

Why it Matters

While the Art Center Holdings case is still pending before a  California appellate court, and the Aspen Dental and Carbon Health settlements represent   compromises of disputed claims without any admission of liability and are not binding as a matter of law, these matters are illustrative of the California AG’s evolving position regarding succession/share transfer agreements in particular.  The potential impact of a categorical prohibition against succession/share transfer agreements would be a significant shock to the California marketplace given their widespread use.  In an amicus brief filed in the Art Center Holdings case,  the California Medical Association (CMA)warns that such an outcome could have unintended consequences to the industry by adversely impacting the ability of MSOs to provide needed capital to PCs and depriving PCs of management expertise upon which clinicians rely so they may focus on clinical care.

Nonetheless, the settlements are notable because they make clear the California AG is willing to mandate corporate reorganizations for alleged corporate practice of medicine violations, assert liability against corporate executives, and leverage newly granted authority under SB-351 against private equity groups and hedge funds.  Further, it is worth noting that enforcement actions in California are often adopted in other jurisdictions, and state attorneys general in other corporate practice states may view these settlements as a roadmap for similar investigations.

Key Takeaways

Given these developments, stakeholders utilizing the friendly PC model in California should actively review their ownership, governance, and contractual arrangements.  Not only should friendly PC arrangements be reviewed to determine whether they are facially consistent with the California AG’s evolving view, but the practical implications of the MSO-PC relationship should be evaluated as well.  Succession/share transfer agreements, in particular, should be assessed with respect to the triggers for a physician-ownership change and the degree of control MSOs retain over the selection of new physician owners.

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