The friendly PC model in California is still lawful as of October 2026. One term inside it is now under direct attack: the MSO’s contractual right to replace the physician who owns the professional corporation. The Attorney General told the Court of Appeal in March that the right is unlawful even when nobody uses it, then wrote that position into a settlement in June.
If your structure runs on a continuity agreement, an assignable option or a stock transfer agreement, this is about your paperwork.
Three 2026 documents moved the friendly PC model in California
| Date | Document | What it says | Status as of October 1, 2026 |
|---|---|---|---|
| March 30, 2026 | Attorney General’s amicus brief, Art Center Holdings, Inc. v. WCE CA Art, LLC, No. B338625 | An agreement that lets a lay corporation replace the PC’s physician-owner violates the corporate practice ban | Appeal pending; we found no decision |
| May 7, 2026 | Settlement with Aspen Dental Management (corporate practice of dentistry) | No replacing practice owners; no fees based on revenue, sales or profits | Announced subject to court approval |
| June 26, 2026 | Settlement with Carbon Health Technologies, its medical groups and its co-founder, L.A. Super. Ct. No. 26STCV19242 | Enjoins the MSA control terms, the assignable option and an exclusive credit facility | Announced subject to court approval |
The Art Center Holdings v. WCE amicus brief says the replacement right is the violation
The underlying dispute, in the Attorney General’s description, is between a physician-owned medical practice and a private equity-backed MSO. In an April 30, 2024 order in Los Angeles Superior Court No. 24SMCV01185, the trial court found a corporate practice violation. The Attorney General’s brief quotes that order: “[w]hen and if [a corporation] disagrees with a doctor’s decision, [it] may simply replace any doctor-owner at will.”
The brief’s core sentence is that “lay entities may not exercise or reserve the right to exercise control over a medical practice.” It names the provisions by the labels the industry uses: “continuity agreements,” “assignable options,” or “stock transfer agreements.” Where the MSO can replace the owner and the owner cannot leave the MSO without losing the practice, the brief says, “the physician’s ownership of the PC is a fiction.”
Two footnotes matter to you.
- Footnote 9 limits the argument: “Not all MSO-PC relationships offer this impermissible degree of control.” Without the replacement terms, the brief says, the question is decided by “analyzing the totality of the circumstances.”
- Footnote 11 closes the usual defense: “The fact that a practice is common or customary in an industry does not mean it is legal.”
The brief rests on Business and Professions Code §§ 2052 and 2400, the second of which reads “Corporations and other artificial legal entities shall have no professional rights, privileges, or powers.” It also relies on SB 351, now Health and Safety Code § 1191, effective January 1, 2026.
The Carbon Health settlement turned the argument into an injunction
The complaint alleges the management services agreements gave the MSO “complete authority over advertising; payor negotiations; selection of medical equipment; and the hiring, firing, and compensation of licensed medical professionals.” It alleges the physician shareholder granted the MSO an assignable option, exercisable if the management agreement ended for any reason, or if the MSO decided “in its sole discretion” that the shareholder’s continued ownership would impair its ability to provide management services. On exercise, the shares went to a physician the MSO picked.
The proposed judgment permanently enjoins three things as corporate practice of medicine under §§ 2052(a) and 146(a):
- A management services agreement that grants the MSO that complete authority.
- Granting the MSO any ownership interest in a professional corporation, including through an assignable option that lets the MSO acquire that interest “for its own account.”
- A revolving credit agreement that requires the professional corporations to borrow only from the MSO at an above-market rate.
Read the limits honestly. The judgment was stipulated “without Defendants admitting any liability or wrongdoing” and without adjudication of any issue. It binds those defendants only.
The Aspen Dental terms reach revenue-based fees
The May 7, 2026 settlement concerns dentistry, which has its own corporate practice ban. Its injunctive terms include “Not replacing any practice owner with another dentist of its choosing,” not requiring owners to give up the practice if they end the management relationship, and “Not basing service fees on revenue, sales, or profits.”
See how a California medical director arrangement is priced when a percentage is off the table.
The California Medical Association argues for a fact-dependent test
The strongest counterargument comes from the physicians’ own association, which sponsored SB 351. Its April 13, 2026 amicus brief agrees that “The trial court’s conclusion was correct” on these facts. It also concedes that an unlimited right to replace the owner is a “strong, if not dispositive, indication of improper control over the ownership of a medical corporation.”
Where it parts from the Attorney General is the rule. A categorical ban on removal rights, it says, “may be too blunt an application of CPOM.” It argues that SB 351 itself raises no categorical prohibition on any particular contract term in a friendly PC arrangement.
Investors make a related argument: an MSO that funded the build-out needs protection if the physician-owner dies, loses a license or walks away. That concern is legitimate. The open question is which mechanism answers it.
Where our position differs from the standard MSO continuity agreement
MDside is a physician-led PC-MSO, so we have a stake in this. We think the Attorney General’s reading is the one to design for, whatever the Court of Appeal decides.
- The MSO should not choose the owner. Succession should run through the professional entity’s own governance, with a licensed successor the physicians select.
- Triggers should be objective: death, disability, loss or restriction of license, exclusion from a federal program. A trigger that fires on the MSO’s discretion is a replacement right.
- Exit should run both ways. The physician-owner must be able to end the management agreement without forfeiting the practice.
- Fees should be fixed against a written scope. See how our structure works.
The at-will option held by the MSO is common market practice. After this year, common is a weak defense in California.
A decision sequence for your MSO continuity agreement
- Find every document that can move PC shares: the continuity or succession agreement, the option, the stock pledge, the shareholder agreement.
- Ask who selects the successor physician. If the answer is the MSO, mark it.
- List the triggers. Mark any that depend on the MSO’s judgment or on termination of the management agreement.
- Ask whether the physician-owner can replace the MSO and keep the practice.
- Read the MSA for authority over hiring, firing, compensation, advertising, payor contracts and equipment.
- Check how the PC is financed and whether it may borrow elsewhere.
These documents are defined in our glossary.
What this means for you
Do not wait for the Court of Appeal. Pull the continuity agreement and the MSA this month and run the six steps. If the MSO can pick the owner or remove the owner at will, have California counsel redraft before a regulator, a buyer or a departing physician raises it for you. This applies to a single-location med spa as much as to a funded online brand: the brief does not confine its reasoning to private equity.
Frequently asked questions
Is the friendly PC model legal in California in 2026?
Yes. As of October 2026 no statute or published decision bans the model itself. The Attorney General’s March 30, 2026 brief targets something narrower: agreements that let a lay MSO replace the physician-owner, or that cost the owner the practice for leaving the MSO.
What did the Carbon Health settlement require?
The proposed judgment in Los Angeles Superior Court No. 26STCV19242 enjoins a management agreement giving the MSO complete authority over advertising, payor negotiations, equipment and clinician hiring and pay; any MSO ownership interest in the PC, including by assignable option; and an exclusive above-market credit facility. It was stipulated without admission.
What is Art Center Holdings v. WCE about?
It is an appeal in California’s Second Appellate District, No. B338625, from a trial court order finding that a private equity-backed MSO’s power to replace a medical practice’s physician-owner violated the corporate practice ban. The Attorney General and the California Medical Association both filed amicus briefs in spring 2026.
Is an MSO continuity agreement illegal in California?
No court has said every such agreement is unlawful. The Attorney General’s position is that one giving the MSO the right to replace the physician-owner violates the ban, even if never exercised. The California Medical Association argues for a case-by-case test. We found no appellate decision as of October 1, 2026.
Does this affect med spas that have no private equity investor?
The brief’s reasoning is not confined to private equity. It relies on Business and Professions Code §§ 2052 and 2400, which apply to every lay entity, and cites Medical Board guidance on control of physician hiring and firing. SB 351 adds remedies against private equity groups and hedge funds.
This is general information, not legal advice. Rules vary by state and change. Confirm your own facts with counsel.