Newly Enacted California Law Formalizes Corporate Practice Restrictions

On October 6, 2025, Democratic Gov. Gavin Newsom of California signed SB 351 into law, placing new restrictions on physician and dentist management platforms operated by private equity groups and hedge funds. The statute targets these platforms in two main ways in order “to ensure that clinical decisionmaking and treatment decisions are exclusively in the hands of licensed health care providers.” First, the law codifies certain corporate practice of medicine (CPOM) restrictions that previously existed only in guidance. Second, the law prohibits certain noncompete clauses. Gov. Newsom signed this bill just one year after he vetoed a bill with restrictions on private healthcare acquisitions, as discussed in our prior Updates here and here, and is considering AB 1415, which requires reporting of certain healthcare transactions by private equity and hedge funds. 

Corporate Practice of Medicine Provisions

California’s new law strengthens the state’s CPOM framework by outlining what hedge funds and private equity groups can and cannot do as part of their involvement with a physician practice or dental practice that conducts business in the state of California. The list of actions prohibited by SB 351 closely tracks those found in the Medical Board of California’s guidance related to the corporate practice of medicine. However, the Medical Board’s guidance is nonspecific and broadly applies to all unlicensed entities and persons. By contrast, SB 351’s restrictions apply only to private equity groups and hedge funds. 

 

The list of prohibited actions falls into two categories:

1. Interfering with a physician or dentist’s professional judgment in making healthcare decisions, including those related to
   1. the appropriateness of diagnostic tests
   2. the necessity of referrals to other healthcare providers
   3. the ultimate overall care of patients
   4. the number of patients a physician or dentist will see or the number of hours they will work in a given period of time
2. Exercising control over or being delegated certain powers, such as
   1. owning or determining the content of patient medical records
   2. making staffing decisions based on clinical competency
   3. setting parameters for contractual relationships with third-party payors or with other physicians or dentists for the delivery of care based on clinical competency or proficiency
   4. deciding on coding and billing for patient procedures
   5. approving the selection of medical equipment and supplies

The bill renders any contract or agreement that enables such prohibited interference or control void, unenforceable, and against public policy. Moreover, the bill clarifies that the form of the practice (sole proprietorship, partnership, corporation, etc.) does not affect the applicability of these restrictions. However, the law explicitly permits unlicensed persons or entities to assist or consult with a physician or dental practice to perform the tasks in the second group (i.e., unlicensed individuals can assist in making staffing decisions, setting parameters in relationships with third-party payors, etc.).

 

SB 351 also restricts noncompete and nondisparagement clauses in contracts involving private equity or hedge fund management or ownership of medical and dental practices. In particular, such contracts cannot include clauses barring physicians or dentists from (1) competing with the practice after leaving or being separated or (2) speaking out publicly about the practice on topics related to quality or utilization of care, ethical concerns, or the revenue strategies used by the private equity group or hedge fund. 

 

Notably, the bill spells out two exceptions to the noncompete and nondisparagement restrictions in SB 351. First, the bill does not affect the validity of an otherwise enforceable noncompete agreement that is connected with the sale of a business; these are already permitted under California law. Second, the bill does not invalidate confidentiality clauses that protect nonpublic business information as long as the clause does not prevent required legal disclosures or the public commentary about the practice on topics related to quality of care, ethical concerns, etc. 

 

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Unless California amends the statute, the law will take effect on January 1, 2026. The attorney general is entitled to enforce the law through injunctions or other equitable remedies.

Private equity sponsors or hedge funds operating physician or dental management platforms in California should closely review their arrangements for compliance with these new requirements.