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"Wait—does this mean our continuity agreement is illegal?"
That's the question I've been fielding since March 30, 2026, when California Attorney General Rob Bonta filed an amicus brief in Art Center Holdings, Inc. v. WCE CA ART, LLC (No. B338625), a case pending before the California Second District Court of Appeal. The AG wasn't asked to weigh in. He did it anyway—filing in support of neither party, because both the plaintiff and the defendant were urging the appellate court to adopt a more permissive standard than the trial court used. The AG's message: the trial court got it right, and loosening that standard would harm patients.
His position: certain MSO-PC arrangements may violate California's corporate practice of medicine prohibition—not because the MSO exercised its control rights, but because those rights exist at all.
If your company uses an MSO-PC structure in California, this is the enforcement signal you've been waiting for. Here's what it means.
What the AG Actually Said
California has prohibited corporations and non-physicians from practicing medicine—directly or indirectly—for nearly a century. Three statutes do the work. Business & Professions Code § 2052 makes it illegal to practice medicine without a license. Section 2264 extends that prohibition to anyone who employs or assists an unlicensed person in practicing medicine—which courts have applied to lay entities that exercise control over licensed practices. And Section 2286 makes it unprofessional conduct for a physician to violate the Moscone-Knox Professional Corporation Act (Corporations Code § 13400 et seq.), the law that governs who can own and operate a medical corporation in California. The policy behind all three is the same: clinical judgment belongs to physicians, not to the business entities that support them.
None of that is new. What's new is SB 351, signed by Governor Newsom on October 6, 2025 and effective January 1, 2026. SB 351 codifies California's existing CPOM restrictions into statute, explicitly prohibits private equity groups, hedge funds, and the MSOs they control from interfering with physician judgment, and voids contracts that enable that kind of control. More importantly for this discussion: it gives the Attorney General direct authority to seek injunctive relief and recover attorneys' fees. The AG's amicus filing is the opening move in what that enforcement authority now makes possible.
The case itself involves a dispute between a physician-owned medical practice and a private equity-backed MSO. In most MSO-PC models, a licensed physician owns the PC, the MSO provides management services under a carefully constructed agreement, and everyone gets paid. These structures often include additional agreements covering equity transfer, succession, continuity, or replacement of the physician-owner. Standard stuff in most state —until now.
The AG's argument is that where an MSO has the contractual power to replace the physician-owner—or force a transfer of the PC's ownership to a physician the MSO selects—the MSO effectively controls the medical practice. And here's the part that matters most: the AG argues the mere existence of those rights creates a CPOM problem, even if the MSO never uses them.
At the trial court level, the dispute resulted in the appointment of a receiver to restore control of the practice to the physicians after the court found that the continuity agreement supported a CPOM violation.
The Provisions That Create a "Captive PC"
The AG targets three interlocking provisions that, taken together, give an MSO near-complete control over the physician-owner—effectively creating a captive PC that exists at the beck and call of the MSO:
- Continuity Agreements, Assignable Options, and Stock Transfer Agreements: Provisions giving the MSO the right to replace the physician-owner with a doctor of its choice.
- MSO Approval Rights Over Ownership Transfers: Restrictions that prevent the physician-owner from selling or transferring PC ownership without MSO consent.
- At-Will MSO Termination Tied to Ownership Consequences: When the MSO terminates the management agreement, the physician-owner's equity transfers to a new doctor selected by the MSO—leaving the physician-owner with no exit that preserves ownership.
The AG's position distills to three points. First, when an MSO can replace the physician-owner with a different doctor of its choice, the MSO effectively owns and controls the medical practice. Second, this control violates CPOM even if the MSO never exercises that right—the mere existence of the power creates an impermissible division of loyalties. Third, these agreements are void and unenforceable under California law.
The AG's press release put it plainly: MSOs may assist with administrative and back-office support, but "cannot own or operate medical practices" or exert undue influence over licensed medical professionals. When these three provisions operate together, the AG's position is that the nonprofessional corporation holds undue control over a captive medical practice—and that the agreements giving it that control are void, whether or not they were ever enforced.
And the brief goes one step further: the physician-owner who participates in one of these arrangements doesn't just face regulatory risk from the MSO's conduct. The AG's position is that the physician-owner aids and abets the CPOM violation. They’re at risk as well.
Why Do These Provisions Exist in the First Place?
In a significant number of MSO-PC arrangements, the MSO is not simply a back-office vendor collecting a management fee. It's a lender and an investor. It fronts the capital to stand up the medical practice: buildout costs, equipment, staffing, technology infrastructure, licensing and credentialing support, working capital. The MSO is carrying significant financial risk.
From that vantage point, the provisions the AG is now targeting make intuitive business sense. An MSO that has deployed significant capital has a legitimate interest in ensuring the practice is run by someone who is licensed, capable, and trustworthy. If the physician-owner becomes incapacitated, loses their license, proves incompetent, or simply walks away, the MSO's investment is at risk. Continuity agreements, stock transfer restrictions, and replacement rights are the tools MSO counsel have historically used to protect that investment—to ensure the lights stay on if something goes wrong with the physician-owner.
This context matters for two reasons. First, it explains why these provisions are so common—they reflect a genuine business concern, not merely an attempt to circumvent CPOM. Second, it explains why the AG's position is so disruptive. The AG is not saying the financial interest is illegitimate. He is saying that the legal mechanism MSOs have used to protect it—the right to select or compel a replacement physician-owner—is itself the CPOM violation. The problem isn't the motivation. It's the solution. Companies now face the challenge of protecting the MSO's legitimate financial interest without the contractual levers the AG says cross the line.
What This Does—and Doesn't—Mean
This is not a final ruling. The California Second District Court of Appeal is not required to adopt the AG's position, and the filing doesn't invalidate MSO-PC structures on its own. But that framing understates the practical stakes.
The AG doesn't need the appellate court to agree with him. SB 351 vests enforcement authority directly in the AG's office—authority to seek injunctive relief and recover fees based on the AG's own interpretation of what constitutes impermissible control. A company could prevail on the contract dispute before the Second District and still face an enforcement action under SB 351 premised on the same facts. The court and the AG operate on parallel tracks.
The AG's brief also acknowledges that not every MSO-PC arrangement is impermissible and that the analysis depends on the totality of the circumstances. This is not a blanket attack on the model. But it would be unusual for California courts to interpret the Medical Practice Act and SB 351 in ways that flatly contradict the chief enforcement officer's stated position. The more the AG's framework becomes the baseline for enforcement, the more pressure courts will feel to align with it—or explain in detail why they are not.
The brief is the roadmap. The enforcement actions could follow before the appellate court even rules.
California Is Not Alone
The California AG's brief isn't creating a new legal theory. It's applying existing CPOM doctrine to contractual provisions that other states have already moved to restrict by statute. The direction is consistent: legislators and regulators are systematically narrowing the tools MSOs can use to protect their investment in medical practices through contract.
Oregon: The enacted benchmark. Oregon's Senate Bill 951, signed June 9, 2025, is the only state law that explicitly prohibits stock transfer restriction agreements between MSOs and physician-owned practices. Beyond that, MSOs are broadly prohibited from exercising de facto control over a medical entity's administrative, business, or clinical operations. Dual ownership between an MSO and the practices it manages is restricted. Compliance deadlines are staggered—new MSOs must comply by January 1, 2026; existing MSOs have until January 1, 2029.
Oregon's law is already being tested in court. In April 2026, Eugene Emergency Physicians filed suit against PeaceHealth and ApolloMD, alleging that ApolloMD's arrangement with a newly formed single-physician LLC was a front to sidestep Oregon's CPOM restrictions. After hearing witness testimony through May 4, 2026, the federal district court judge expressed skepticism that the arrangement complied with Oregon's statute. This is what enforcement looks like in practice—and it arrived less than six months after the law took effect for new MSOs.
Vermont: The next one to watch. Vermont's HB 583 passed the House on March 20, 2026, and is pending in the Senate. If enacted, it would explicitly prohibit stock transfer restriction agreements, bar dual ownership between MSOs and the practices they manage, and prohibit MSOs from controlling operations that affect clinical decision-making. Proposed effective date: July 1, 2026.
The broader picture. Washington, Rhode Island, Minnesota, and New Hampshire have all introduced bills in 2025 or 2026 targeting MSO control of physician practices—most focused on the same pressure points: stock transfer restrictions, dual ownership, and de facto operational control. Most have stalled. Industry pushback is real. But the legislative pattern is consistent enough to warrant re-examination of these very common structures.
California isn't the leading edge of this trend—Oregon got there first, and Vermont may follow by summer. What California adds is enforcement authority under SB 351 applied to the same contractual provisions Oregon has already banned outright. If your MSO-PC structure would fail Oregon's test, it is worth asking whether it will survive California's.
The Questions Your Documents Need to Answer
This is the moment to pull your MSO-PC documents and ask:
- Does the physician-owner retain genuine control over clinical matters?
- Can the physician-owner remove or replace the MSO without forfeiting ownership of the practice?
- Does the MSO have any right to select, replace, approve, or force out the physician-owner?
- Are transfer restrictions designed to preserve legal compliance, or do they give the MSO practical control over the PC?
- Do governance rights protect the MSO's legitimate business interests without crossing into control of the medical practice?
- Are management fees, reserved powers, staffing rights, and operational controls consistent with California CPOM requirements?
Contractual architecture matters. Rights that are never exercised can still create regulatory risk if they appear to give a lay entity practical control over a medical practice.
How to Think About Mitigation
There is no universal fix. Courts and regulators apply a totality-of-the-circumstances analysis, which means the right answer depends on the specific facts of your structure, your state, and your documents. Start with first principles.
- Identify the applicable state law and medical board guidance. CPOM doctrine varies materially by state. Some states have explicit statutory prohibitions; others operate through case law, attorney general opinions, or board guidance. You need to know exactly which rules apply in each state where your MSO-PC operates before you can assess risk.
- Where the state explicitly prohibits a practice, follow it. If a jurisdiction expressly bars a contractual provision—MSO-held rights to replace the physician-owner, stock transfer restriction agreements—there is no mitigation strategy that makes that provision safe. Eliminate it.
- Where the law is unsettled, map the gray areas. Not every jurisdiction draws the line in the same place. In states like California where the enforcement posture is evolving, the question isn't just what is prohibited today—it's what a regulator or court applying a totality-of-circumstances standard would make of your structure on its worst day.
- Analyze your documents holistically—not provision by provision. The AG's brief targets three interlocking provisions precisely because no single clause tells the full story. The MSA, the PC bylaws, any continuity or stock transfer agreements, loan or deficit spending agreements, security agreements, indemnifications, and any governance documents all need to be read together. What happens when the physician-owner dies, exits, or wants to leave? What happens if the MSO terminates the management agreement? If the answer to any of those questions puts control exclusively in the hands of the MSO, the structure has a problem—regardless of which document the relevant provision appears in.
No two companies are alike. What works for a seed-stage startup may not be the right fit for a Series A company that's been operating for five years. And the goal isn't just to document physician clinical independence in theory—it's to make sure the structure actually works that way in practice.
The Bottom Line
California is a major healthcare market. MSO-PC structures are a common and legitimate tool for aligning clinical expertise, operational scale, and capital. The AG's brief doesn't change that.
What it does change is the risk calculus for companies whose documents give the MSO practical control over the physician-owner—even on paper, even if those rights have never been used. In a regulatory environment that's moving this fast, proactive review isn't just good hygiene. It's a competitive advantage.
We've helped hundreds of companies navigate CPOM. If your formation documents put your company at risk, reach out—we can work with you to build a structure that protects the company and fits your business.