Executive Summary

• Companies operating a management services organization-professional corporation (MSO-PC) structure in California should review their agreements in light of the California Attorney General's amicus brief in Art Center Holdings, with a particular focus on STRAs and MSAs, to minimize enforcement risks for both the MSO and the physician owners.
• The amicus brief is a clear sign that the California Attorney General intends to ramp up enforcement against MSOs and affiliated physician owners.
• Companies should work with knowledgeable healthcare counsel with experience in MSO-PC structures to strike the right balance between reducing enforcement risks and maintaining the MSO-PC model’s structural integrity so that company value, investability, and future liquidity options are retained.
• Document remediation is most effective and least costly when done proactively, rather than in response to a dispute or under scrutiny and time pressure as part of due diligence for a transaction, financing, or initial public offering (IPO).
• Further, documentation is only part of the picture, and operational practices, such as how the MSO and PC interact day to day, are critical to corporate practice of medicine compliance.

Introduction

On March 30, 2026, California Attorney General Rob Bonta (the Attorney General) filed an amicus curiae brief in Art Center Holdings, Inc. v. WCE CA Art, LLC,¹ a case currently pending before the California Court of Appeals, Second Appellate District. In that brief, the Attorney General takes the position that an agreement giving an unlicensed corporation the right to replace the physician-owner of a medical practice with a different physician of the corporation's choosing causes the corporation to "effectively own[] and control[] all aspects of the practice," and that such arrangements violate California's prohibition on the corporate practice of medicine (CPOM). The Attorney General further asserts that, where the physician-owner cannot easily terminate the management services agreement (MSA) without losing ownership of the practice, the MSO has impermissible control over that practice, which is also a CPOM violation.

The implications are significant. The vast majority of MSO-PC structures in California (and across the U.S.) rely on stock transfer restriction agreements (STRAs, sometimes called continuity, succession, or transfer agreements) and long-term MSAs that contain precisely the features the Attorney General has now opined are unlawful. According to the Attorney General, the mere existence of these provisions can constitute a CPOM violation, regardless of whether the MSO has ever attempted to exercise them. The Attorney General has also stated that enforcement liability extends not only to the MSO but also to the physician-owners of the professional corporation (PC), on an aiding-and-abetting theory.²

Accordingly, companies and physicians operating under an MSO-PC structure in California should promptly review their existing STRAs and MSA termination provisions to ensure compliance with California law and reduce enforcement risks.

Background

Corporate Practice of Medicine 101

California’s corporate practice of medicine prohibition flows from the Medical Practice Act, which prohibits any unlicensed person, including a corporation, from practicing medicine in California.³

The California Attorney General has stated that the ban exists to (i) protect the integrity of the professional licensing scheme, which is built on personal qualification and accountability; (ii) prevent the divided loyalties that arise when a lay commercial entity is interposed between a physician and the patient; and (iii) shield patients from "commercial exploitation of the practice of medicine" by middlemen seeking profit from the physician-patient relationship.⁴

For a more detailed primer on the corporate practice of medicine and how the MSO-PC structure is intended to navigate it, see our client alert: The Corporate Practice of Medicine: Essential Guidance for Digital Health Companies and Investors.

STRAs

In a typical MSO-PC arrangement, a licensed physician owns the equity of the PC that delivers medical services, while a separately owned MSO provides administrative and back-office services to the PC under a long-term MSA. The MSO’s investment in the administration and back-office services relies on the continuity of the relationship between the MSO and the PC. Accordingly, in addition to a long-term MSA, the MSO owner typically maintains a mechanism to minimize the risk that the PC is transferred to an unfamiliar physician owner.

That mechanism is typically a STRA. STRAs may (i) limit the physician-owner’s ability to transfer, pledge, or otherwise encumbering the PC's equity without the MSO's consent; (ii) impose transfer obligations triggered by specified events such as death, disability, license revocation, or termination of an underlying employment or services agreement; and (iii) reserve to the MSO the right to designate a successor physician-owner to whom the equity must be transferred upon the occurrence of a triggering event.

These features have been considered standard and customary across the private equity and venture-backed healthcare industry for decades. The Attorney General has now made clear that it does not believe customariness is a defense.

The Art Center Holdings Case

The Art Center Holdings case arises out of a contractual dispute between a physician-owned PC operating a fertility practice and the private equity-backed MSO that supports it. In a Motion to Appoint Receiver, the trial court held that the MSO's exercise of a continuity-type agreement to compel a transfer of the PC's equity violated California's CPOM doctrine and justified a receiver's appointment for the medical practice. The case is now on appeal before the Second Appellate District, where neither the MSO nor the PC has asked the Court of Appeal to affirm the trial court's CPOM holding, and both parties advocate for more permissive standards. It was against this backdrop that the Attorney General filed an amicus brief, urging the Court of Appeal to affirm the trial court's CPOM analysis. The amicus brief also makes public the Attorney General’s view of the CPOM doctrine.

Recent Legislative History

On October 6, 2025, Governor Newsom signed Senate Bill 351 (SB 351), which took effect on January 1, 2026, and codified California's long-standing CPOM guidance. Among other things, it states that lay individuals and companies should not do certain acts, such as selecting, hiring, or firing healthcare professionals or setting parameters under which healthcare professionals can enter into contracting relationships with third-party payors, or make coding and billing decisions. Notably, SB 351 acknowledges the role of an unlicensed person or entity in assisting professional entities with certain activities so long as the ultimate responsibility remains with the professional.

SB 351 explicitly authorizes the Attorney General to seek injunctive relief and other equitable remedies, and to recover attorneys' fees and costs, in any action to enforce these provisions. That enforcement authority is in addition to the Attorney General's authority under the Unfair Competition Law, which could potentially be applied to CPOM violations as "unlawful" business acts.⁵ In addition, the Attorney General has general investigative and subpoena powers as the State's chief law enforcement officer.

Previously, Assembly Bill 3129 (AB 3129) was introduced during the 2023-2024 California legislative session, but was ultimately vetoed by Governor Newsom. AB 3129 proposed restrictions similar to those advocated for in the Attorney General’s amicus brief, such as expressly limiting the use of long-term MSAs and STRAs.

The Attorney General’s Amicus Brief⁶

The Attorney General's central argument in its amicus brief is that, "[(1)] when an agreement gives an unlicensed corporation the right to replace the physician-owner of a medical practice with a different physician of its choice, the corporation effectively owns and controls all aspects of the practice [and (2)]… when the practice's ostensible physician-owner cannot replace the unlicensed corporation without fear of losing ownership over their practice, the corporation has undue control over that practice."

This argument identifies two issues the Attorney General has with commonly structured MSO-PC arrangements. The first is the STRA itself, and the second is the MSA's termination provisions. According to the Attorney General, each of these provisions, standing alone, is sufficient to violate CPOM; together, they create a "captive PC."

Several aspects of the brief deserve particular attention.

The Attorney General believes the mere existence of the STRA can be a CPOM violation.
The Attorney General argues that nonphysicians violate CPOM either by exercising inappropriate control over a medical practice or by retaining the right to do so. The brief goes further than the trial court's holding by asserting that even where the MSO has never invoked its right to replace the physician-owner, the contractual reservation of that right itself "causes an impermissible division of loyalties" on the part of the physician-owner, who must choose between independent professional judgment and the risk of losing the practice.

Liability extends to the physician-owners, not just the MSO.
The Attorney General states that, "When the terms of an agreement facially violate California's prohibition against the corporate practice of medicine, the violations go to both the lay corporation practicing medicine without a license and the doctors who aided and abetted that unlicensed practice." This sentence signals that the Attorney General could pursue action against both the MSO and the PC’s physicians owners, which could have licensure consequences before the Medical Board of California.

"Common and customary" is not a defense.
The argument that “everyone else is doing it” is no more persuasive to the Attorney General than it was to your mom. The Attorney General expressly states that “the fact that [STRAs] [are] common or customary in an industry does not mean it is legal or immunize it from enforcement under California law.” Further, the fact that a company's MSO-PC documents were originally drafted or reviewed by qualified advisors at formation is not by itself sufficient. Compliance is not a one-time exercise at formation; companies operating under MSO-PC structures have a continuing obligation to update their documents as the law and applicable standards evolve.

Enforcement Risks

The Attorney General’s amicus brief is a clear sign that the Attorney General intends to ramp up enforcement against MSOs and affiliated physician owners. An amicus curiae brief is a non-party submission intended to influence the court, but it is neither binding nor a court decision. However, it is a clear public statement on the Attorney General's current views on CPOM in the MSO-PC context, signaling increased CPOM enforcement risk. While it remains unknown whether the California legislature or courts will adopt the Attorney General’s legal theory, companies should not disregard the significance of this public statement.

Next Steps

Companies and physicians operating under an MSO-PC structure in California should complete a comprehensive review of their STRAs and the termination and default provisions of their MSAs. Such revisions should be undertaken carefully to comply with the Attorney General’s view of CPOM, while also not dismantling the protections necessary to safeguard the MSO’s investment in its administrative services. These revisions should be done by knowledgeable healthcare counsel specializing in these structures, as the right answer for any given platform depends on its specific facts, such as the medical specialty, the physician-owner, the structure of the equity, the existence of related employment and noncompete agreements, the lender and investor consents that may be implicated, the parties risk tolerance, dynamics of private equity versus venture backed MSOs, and other factors.

Companies should review their MSO-PC documents at least annually, as any document remediation is most effective when it is done before a dispute or due diligence related to a transaction, financing, or IPO. Further, documentation is only part of the picture and operational practices, such as how the MSO and PC interact day to day, are critical to ultimate CPOM compliance.

For more information on how to revise MSO-PC documents for California CPOM compliance and navigate related enforcement risks, please contact Andrea Linna, Maureen Ohlhausen, Tarek Helou, Nawa Lodin, Ben Allen, Seamus Taylor, Abigail Hermes, or any member of Wilson Sonsini’s Digital Health, Antitrust and Competition, and Litigation practices.

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^[1]Art Center Holdings, Inc., et al., v. WCE CA Art, LLC, et al., No. B338625 (Cal. Ct. App.).

^[2]Cal. Bus. & Prof. Code § 2000 et seq.

^[3]See Attorney General amicus brief, page 12.

^[4]65 Ops.Cal.Atty.Gen. 223 (1982).

^[5]Cal. Bus. & Prof. Code § 17200.

^[6]On April 13, 2026, the California Medical Association also filed an amicus brief in the Art Center Holdings case, which urges the Court of Appeal to take a fact-based, context driven approach to CPOM interpretation and enforcement, instead of the categorical hard-line approach presented by the Attorney General.