Corporate Practice of Medicine Update: California Attorney General Examines the Friendly Professional Corporation Model

In the past month, the California Attorney General examined two friendly professional corporation (PC) model arrangements, providing insight into how California regulators may assess such structures under the state’s corporate practice of medicine (CPOM) doctrine. These developments are important for sponsors of friendly PC platforms in California to continue to monitor.

The vast majority of states accept the friendly PC model, which has long been recognized as a balanced approach to ensure appropriate protection of clinical decision-making for physicians while allowing opportunities for investment in the healthcare space.

The actions by the California Attorney General follow multiple laws that California enacted in 2025 formalizing CPOM restrictions and targeting healthcare investments, as discussed in prior Sidley Updates here and here. Healthcare investors and sponsors operating in or thinking about doing so in California will be closely monitoring these developments when making investment decisions.

Art Center Holdings, Inc. v. WCE CA Art, LLC

This case involves a receivership of a medical practice to transfer shares and control back to the original physician owner. The structure under review involved a common friendly PC structure in which the management services organization (MSO) entered into a continuity agreement that provided for automatic transfer of PC ownership to another appropriately licensed individual upon the occurrence of certain events, including one ultimately at the discretion of the MSO. The trial court concluded that the continuity agreement gave the MSO impermissible control over the practice, emphasizing that “[e]ven the presence of such agreements violate California’s ban on the unlicensed practice of medicine because medical doctors are placed in an untenable position” to comply with corporate demands or risk losing ownership of the practice.

The case is on appeal at the California Court of Appeal. Two contrasting amicus briefs have been filed related to the pending appeal:

• The California Attorney General takes a categorical approach against certain common friendly PC arrangements. He argues that “[a]greements that give a nonprofessional corporation the right to replace a PC’s physician-owner with a doctor of its choice violate California’s prohibition on the corporate practice of medicine by giving the corporation undue control over a captive medical practice.” In the Attorney General’s opinion, an MSO’s “retaining ultimate control over the employment of a medical practice’s physician-owner” means that “a nonprofessional corporation indirectly controls all aspects of the practice.”
• In contrast, the California Medical Association (CMA) argues that CPOM does not require categorical prohibitions of common friendly PC arrangements. CMA advocates a more measured approach to evaluating such arrangements, noting that the “friendly PC arrangements are common and can be useful to carry out business alignment strategies between physicians and lay managers or other partners.” As such, CMA urges the court to adopt a context-driven approach in which “CPOM enforcement must be context- and fact-dependent ... necessitating a nuanced approach to rooting out both direct and subtle forms of improper influence or control.”

A decision from the appeals court is pending.

California v. Aspen Dental Management, Inc.

The California Attorney General also recently entered into a settlement agreement to resolve CPOM allegations against Aspen Dental, a dental MSO. This settlement occurs approximately 11 years after Aspen Dental entered into a CPOM-related settlement agreement with the New York Attorney General. In the New York settlement, Aspen Dental was required to pay a $450,000 civil penalty and was not permitted to discuss certain clinical matters with clinical staff, impose clinical policies without dentist approval, interview clinical staffing candidates without clinical staff, budget for practices, and enter into certain noncompetition agreements with dentists, among other terms.

In the recent California settlement, the Attorney General alleged that Aspen Dental exceeded its role as a dental support organization and engaged in the practice of dentistry, thereby violating California’s Unfair Competition Law and SB 351 (a CPOM restriction on platforms associated with hedge funds and private equity sponsors discussed in our prior Sidley Update, here).

The settlement terms impose a monetary fine of $2 million and restrictions on the company’s operations, including some that appear to go beyond the prior New York settlement and beyond the words of SB 351:

• requiring the MSO to annually renegotiate its management services agreements between PCs and MSOs
• requiring the MSO to assign practice leases to licensed dentists or entities before operations begin and allowing former practice owners to continue leasing after termination under specified conditions
• prohibiting the MSO from requiring practice owners to surrender offices or equipment upon termination and instead requiring the platform to allow owners to assume leases and purchase equipment at fair market value