The California Attorney General (AG) filed an unsolicited amicus brief in Art Center Holdings, Inc., et al. v. WCE CA ART, LLC, et al., arguing that professional corporation–management services organization (PC–MSO) arrangements in which the management services organization (MSO) maintains rights to replace the physician-owner violate California’s prohibition on the corporate practice of medicine (CPOM), even if the MSO never exercises those rights. The filing is worth monitoring for California PC-MSO models that rely on continuity agreements, assignable option agreements, stock transfer agreements, or similar arrangements that grant the MSO certain contractual controls to replace physician owners.
In this alert, our California healthcare lawyers explain California’s CPOM framework, analyze the AG’s arguments and their intersection with existing state regulations governing investor influence in healthcare, and outline practical strategies for addressing compliance.
CPOM interpretation at the center of initial dispute and amicus brief
The underlying dispute arises from WCE, a private equity-backed MSO that provided management services to a physician-owned professional corporation. The trial court granted a receivership to restore control to the physicians, finding that WCE’s Continuity Agreement, which permitted the MSO to terminate the physician-owner and transfer PC equity to an MSO-chosen successor physician, constituted an unlicensed CPOM. The Court of Appeal case is now pending, with the AG appearing as amicus curiae in support of neither part but endorsing the trial court’s CPOM analysis.
The brief argues that agreements that give nonprofessional corporations the right to replace a PC’s physician-owner effectively grant the corporation control over physician employment and, indirectly, over all aspects of the practice, violating CPOM regardless of whether the replacement right is exercised. Separately, SB 351, signed into law in October 2025, independently codifies longstanding CPOM parameters with specific application to private equity and hedge funds, prohibiting interference with clinical judgment and control over reserved professional functions. SB 351 declares offending contract terms void and unenforceable and authorizes the AG to seek injunctive relief with fee recovery, signaling a meaningful escalation in enforcement prioritization and capacity.
The AG’s brief situates its CPOM analysis within SB 351’s framework, underscoring that private equity- and hedge-fund-backed MSO strategies that control physician employment or clinical functions are squarely within the new statute’s crosshairs.
California’s CPOM prohibition and its purposes
California’s Medical Practice Act prohibits unlicensed persons from practicing medicine and prohibits employing, aiding, or abetting any unlicensed person to do so, forming the basis of the CPOM ban. Courts and the AG have long read this framework to bar nonprofessional corporations from providing or controlling the provision of medical care, except for narrow statutory exemptions, such as certain HMOs and nonprofit community clinics. The policy rationale centers on preventing the commercial exploitation of the physician–patient relationship and the “middleman” profit motive, which can distort clinical judgment through divided loyalties.
California case law and Medical Board guidance on CPOM liability looks at the substance of arrangements, scrutinizing direct exercise and retention of control over medical practice decisions, both contractually and in practice. The Medical Board has historically identified certain decisions affecting a medical practice as nondelegable to unlicensed persons, including MSOs, because they are viewed as clinical decisions that must be reserved for licensed physicians. These include coding and billing affecting care, approving equipment selections, and selecting or firing physicians based on clinical competency.
The PC–MSO model: Permissible administrative support versus impermissible control
The AG acknowledges that nonphysicians may legitimately provide certain administrative and operational support to physician practices, often through MSOs, provided these functions do not confer control over the practice of medicine. In addition to a management services arrangement, common contractual mechanisms in a PC-MSO arrangement include continuity agreements, assignable options, and stock transfer agreements that typically prohibit physician equity transfers without MSO approval, allow the MSO to terminate the management agreement unilaterally, and automatically transfer the PC equity to an MSO-chosen physician upon termination.
The AG’s amicus position in Art Center Holdings
The AG’s amicus filing supports the trial court’s CPOM analysis, arguing that agreements permitting a nonprofessional corporation to replace the physician-owner of a PC violate California law. The brief frames the issue as both control over physician hiring and firing and a broader assertion of indirect control over all aspects of the practice by virtue of potential leverage over the physician-owner.
The AG’s brief explains that when MSOs extend beyond permissible administrative and operational services and assume increasing control over practice governance and decision-making, CPOM is violated. The risk of this impermissible scope creep may arise when an MSO installs a nominal physician-owner of a PC who is subject to contractual controls that allow the MSO to decide who owns or leads the PC’s clinical operations, which the AG views as indistinguishable from lay control and ownership of the medical practice, arguing that even general “comply with law” savings clauses do not cure these provisions because California contract interpretation prioritizes specific replacement and transfer rights over general language.
Importantly, the AG contends that the violation does not depend on the actual exercise of the replacement right; the mere retention of the right creates an impermissible division of loyalties because physicians may tailor decisions to the MSO’s preferences to avoid replacement, thereby undermining patient-centered judgment.
Risk stratification and areas of nuance
In light of the amicus brief and SB 351, risk is heightened for PE-based MSO arrangements in which nonprofessional corporations hold contractual control over physician ownership, hiring, firing, or over functions the Medical Board treats as nondelegable. The AG notes that not all MSO–PC relationships are per se unlawful; absent the offending contractual terms, analysis turns on the totality of the circumstances.
Notably, the brief does not analyze or extend any categorical safe harbor to arrangements that emulate captive PC control features in a clinical context, such as the “medical foundation” model. Where nonprofit health systems operate or align with outpatient practices through friendly PC models, risk likely depends on compliance with governance standards that reserve all clinical functions and physician employment decisions based on competency to licensed professionals.
Calibration strategies aligned to the AG’s view
Importantly, at this time, the AG’s amicus brief represents one interpretation of the law and has not been adopted by any court. This may ultimately prove to be a political signal rather than an immediate change in legal standards. Nonetheless, it is prudent to anticipate enforcement and potential changes to the law, particularly given the AG’s enforcement capabilities under SB 351. For example, agreements may be modified to eliminate MSO-held rights to replace physician-owners. More conservative approaches include: (1) limiting replacement triggers to true “for cause” scenarios; (2) requiring successor physicians to be selected by the PC’s board rather than designated by the MSO; and (3) structuring the control agreement solely between the PC and the physician-shareholder.
Consistent with long-standing CPOM parameters, governance documents and management services agreements should clearly and demonstrably reserve all clinical decision-making, coding and billing that affects patient care, clinical equipment approvals, and physician selection, hiring, and firing based on competency to licensed physicians.
Key takeaways
The AG’s brief addresses “friendly PC” models and investor control in the traditional MSO/PE context, but does not analyze clinical models in California healthcare that utilize this structure, which contain more nuance.
We do not expect the court’s decision in Art Center Holdings to address the AG’s broader arguments, which go beyond the specific issues in the case. However, if these arguments gain traction, or if a sale or other transaction is contemplated (particularly where OHCA review and oversight is triggered for PE-backed enterprises), it may be helpful to proactively review and update relevant agreements. Organizations should inventory their PC–MSO agreements for provisions that enable (or appear to do so) nonprofessional control over physician employment or ownership succession, and assess whether any delegations of clinical functions exist.
Where revisions are warranted, parties should prioritize restructuring replacement-and- succession provisions. Governance documents should clearly reserve all clinical functions and physician employment decisions to licensed professionals. As always, entities should ensure that the operational distinctions between clinical authority and business services are not only documented but actively maintained in practice.