On June 26, 2026, California Attorney General Rob Bonta announced a settlement with Carbon Health Technologies, Inc., its affiliated professional medical corporations, and co-founder and former CEO, Eren Bali (collectively, “Carbon Health”) that imposes $4.5 million in combined penalties and requires a structural reorganization of Carbon Health’s “friendly PC” arrangements to resolve alleged violations of California’s corporate practice of medicine (“CPOM”) prohibition.[1] The settlement is the latest in a coordinated series of California Attorney General CPOM enforcement activity in 2026, following the Attorney General’s amicus brief in Art Center Holdings, Inc. v. WCE CA Art, LLC in March (which we discussed in an April 2026 post)[2] and a settlement with Aspen Dental involving the corporate practice of dentistry in May 2026. This post examines the Carbon Health settlement and its implications for organizations operating under the friendly PC model in California.
The parties to the settlement stipulated to the proposed judgment as a compromise of disputed claims, without any admission of liability or wrongdoing, and the settlement remains subject to court approval. It is not a ruling on the merits, and does not establish as a matter of law which structural features are or are not permissible.[3] It does, however, provide a somewhat detailed view of the contractual terms the Attorney General regards as problematic and the remedies the Attorney General is prepared to pursue. This makes the settlement instructive for any organization that operates or invests in a healthcare services organization structured as a friendly PC in California.
A Coordinated Enforcement Sequence
The Carbon Health settlement is the most recent of three related developments in 2026, and the Attorney General’s announcement discusses the office’s broader CPOM enforcement efforts.[4] On March 30, 2026, the Attorney General filed an amicus curiae brief in Art Center Holdings, Inc. v. WCE CA Art, LLC, a private dispute between a physician practice owner and a private equity-backed management services organization pending before the Second District Court of Appeal. In its brief, the Attorney General urged the appellate court to affirm a trial court holding that certain contractual provisions allowing a management services organization (“MSO”) to replace a practice’s physician-owner violate California’s CPOM prohibition.[5] Separately, on May 7, 2026, the Attorney General announced a settlement with Aspen Dental involving the corporate practice of dentistry and allegations of false advertising, which included $2 million in penalties and $300,000 in restitution.[6] The Attorney General extended its enforcement remedies with the Carbon Health settlement by requiring Carbon Health’s corporate restructuring.
These developments arrive on the heels of the enactment of Senate Bill 351 on January 1, 2026, which strengthened California’s CPOM framework as applied to private equity (“PE”) and hedge fund involvement in physician and dental practices. Among other things, Senate Bill 351 prohibits PE and hedge fund interference with clinical judgment, voids offending contract terms, and authorizes the Attorney General to seek injunctive relief, attorney’s fees, and costs.[7]
The Structure at Issue and the Attorney General’s Theory
The arrangement at the center of all these actions is the so-called “friendly PC” or MSO-PC model. Because California generally prohibits lay people or entities from owning or controlling a medical practice, a non-physician business cannot legally own a professional medical corporation (“PC”). Instead, in the friendly PC model, a licensed physician owns the PC, and a separately-owned MSO contracts with the PC under a long-term management services agreement (“MSA”) pursuant to which the PC engages the MSO, on an exclusive basis, to provide comprehensive administrative and operational support to the PC. California law does not prohibit an MSO from managing the non-clinical, business aspects of a medical practice, provided that the PC and its physicians retain authority and discretion over the practice of medicine and the MSO does not interfere with such activities.[8] Often, given the significant capital and resources expended by MSOs in assisting with the development of a PC’s medical practice, the MSA does not permit the PC to terminate the MSA without cause (but it does permit the PC to terminate the MSA for cause, such as in the event that the MSO does not adequately provide its promised administrative and business support services).
The friendly PC model also commonly involves the physician-owner of the PC entering into a “succession agreement”[9] with the MSO pursuant to which the physician agrees to transfer the shares of stock of the PC to another licensed physician upon the occurrence of certain triggering events, including the physician’s death, disability, loss of license to practice medicine, and other events often tied to the physician’s conduct (e.g., being convicted of a crime) or the physician ceasing to provide services to the PC or to the MSO.
According to the Attorney General’s complaint, Carbon Health Technologies, Inc. (“CHTI”) served as the MSO to a network of PCs operating under the “Carbon Health” brand, and its MSAs gave CHTI complete authority over advertising, payor negotiations, selection of medical equipment, and the hiring, firing, and compensation of the licensed clinicians who worked for the PCs. The MSAs also required the practices to obtain management services only from the MSO (which is a standard requirement under MSAs utilized in the friendly PC structure).[10] The physician-owners of the PCs also granted the MSO an assignable option that permitted the MSO, in its sole discretion, to cause the stock of a PC to be transferred to a physician selected by the MSO if (i) the MSA with that PC was terminated, expired, or not renewed, or (ii) the MSO determined that the physician-owner’s continued ownership of the PC’s stock would impair the MSO’s ability to provide services. The MSO also held a security interest in the PC shares. The complaint alleges that these provisions made the medical practices “captive” to the MSO, whose existence and ownership depended entirely on the MSO’s discretion.[11] In the Attorney General’s view, such level of reserved control is tantamount to ownership and violates California’s CPOM prohibition.[12]
The structure and day-to-day operations as alleged in the Attorney General’s complaint appear more aggressive than a typical “friendly PC” model – e.g., it is highly atypical (and contrary to existing California guidance) for an MSO to make physician hiring/firing decisions or to unilaterally dictate clinical equipment purchases – while still sharing certain common elements, such as the MSO holding a security interest in the physician-owner’s PC equity and providing deficit funding to the PC (functionally akin to a letter of credit).
What the Settlement Requires
The proposed judgment imposes $4.4 million in civil penalties against the Carbon Health entities, together with a $100,000 penalty against Mr. Bali.[13]
The judgment then permanently enjoins the defendants from engaging in the CPOM, and it identifies specific prohibited arrangements that offer a window into the Attorney General’s concerns.[14] These include:
- An MSA granting the MSO complete authority over advertising, payor negotiations, equipment selection, and the hiring, firing, and compensation of clinicians;
- Granting the MSO “any ownership interest in a [PC], including through an assignable option agreement which grants the [MSO] the right to acquire such ownership interests for its own account”;[15] and
- A revolving credit agreement requiring the PC to obtain financing exclusively from the MSO at above-market rates.
Notably, the third prohibition carries an express carve-out permitting the MSO to take a first-priority lien in certain practice assets subject to conventional lender restrictions, which suggests the Attorney General distinguishes between financing used as a mechanism of control and ordinary secured lending on market terms. The judgment enjoins Carbon Health from “engaging in the corporate practice of medicine,” including the arrangements described above, and separately enjoins the advertising, consumer-contract, and billing practices alleged in the complaint. As a practical matter, complying with the injunction requires Carbon Health to restructure these arrangements.
Why This Matters In and Outside of California
Several features make this settlement particularly notable for stakeholders, particularly those whose physician services businesses in California are structured utilizing some or all of the elements of the friendly PC structure allegedly utilized by Carbon Health.
First, the Attorney General is indicating that his office is willing to require corporate reorganization in situations where California’s CPOM prohibition is violated. This matters because a reorganization can fundamentally alter the parties’ arrangement in a friendly PC structure, particularly where the MSO has invested substantial capital in a PC’s growth and operations, but the reorganization leaves the MSO with reduced protections for recouping that investment and realizing an expected return.
Second, it names a company founder and former chief executive individually, a signal to executives and investors that personal exposure is on the table.
Third, it focuses attention on the succession or continuity mechanism – specifically the assignable option that allows an MSO to designate a replacement physician-owner, which is similar to the feature at issue in Art Center Holdings. For private equity and hedge fund-backed structures, the recently enacted Senate Bill 351 compounds this exposure by reaching the management services agreement and related agreements that establish such control and rendering offending terms void and unenforceable.
Even stakeholders outside California should take note of these Attorney General actions, which often serve as a roadmap for other states. AG offices frequently borrow legal theories, investigative tactics, and settlement frameworks from high-profile enforcement matters. For multi-state operators, this creates meaningful spillover risk. Similar structures may prompt parallel inquiries – and potentially inconsistent demands – across jurisdictions. These developments should be treated as an early warning to pressure-test friendly PC structures now, including key contract terms, governance, and operational control provisions, before home-state AGs adopt comparable positions and frame enforcement as “bringing the state in line” with emerging national expectations.
Considerations
The Carbon Health settlement, read alongside the Attorney General’s amicus brief in Art Center Holdings, the Attorney General’s enforcement approach with Aspen Dental, and the enactment of Senate Bill 351, points to several areas that organizations operating or investing in friendly PC structures in California may wish to review.
- Succession and continuity provisions, including assignable options, stock transfer rights, and security interests in PC shares, with particular attention to how much control the MSO retains over the identity of the physician-owner, such as a right to replace the physician-owner in the MSO’s sole discretion, and whether the physician-owner can exit the arrangement without forfeiting the practice. It is worth noting, however, that modifications to such provisions may affect or compromise the ability to consolidate the PC and the MSO for financial reporting and tax purposes.
- Termination rights that function as succession triggers, including whether termination, expiration, or non-renewal of the MSA can itself trigger a transfer of the PC’s equity.
- Buyout and equity terms, including whether a nominal purchase price for the physician’s interest reinforces the perception that the practice is captive to the MSO.
- Financing arrangements, including whether exclusive, above-market financing functions as a control device, as distinguished from conventional secured lending on market terms.
- Consumer-facing practices, including the accuracy of representations in advertising, automatic billing and notice practices, and whether patients are clearly informed of the identity of the PC that owns and operates the medical practice.
Looking Ahead
Neither the Carbon Health nor the Aspen Dental settlement constitutes binding law, and the California Court of Appeal has not yet ruled in Art Center Holdings. The Attorney General’s brief in Art Center Holdings represents the office’s interpretive position on certain aspects of the friendly PC model and does not bind the court. Nonetheless, the trajectory of the Attorney General’s enforcement posture is becoming increasingly apparent. The office has moved beyond interpretive advocacy and into active enforcement, pursuing remedies that compel structural reorganization and impose personal liability on individuals. Recently enacted Senate Bill 351 has further expanded the Attorney General’s enforcement toolkit for private equity and hedge fund-backed arrangements.
Healthcare organizations operating under existing friendly PC structures in California, particularly those involving private equity or hedge fund participation, should consider conducting a proactive check-up of their management services agreements and related ancillary documents to confirm that governance, economics, and operational controls align with the direction of recent enforcement activity. Multi-state platforms should likewise evaluate whether any California-specific revisions are warranted and, more broadly, whether changes made in California should be reflected in other jurisdictions, given California’s outsized influence on policy and enforcement trends in this area.
*Ethan Nikfar is a summer associate in the firm’s Century City office.FOOTNOTES
[1] Press Release, Cal. Att’y Gen., Attorney General Bonta Announces First-of-Its-Kind Settlement with Carbon Health and its Co-Founder for Violating California’s Ban on Corporate Practice of Medicine and Other Healthcare and Consumer Protection Laws (June 26, 2026).
[3] [Proposed] Final Judgment and Permanent Injunction, People v. Carbon Health Technologies, Inc., No. 26STCV19242 (Cal. Super. Ct., L.A. County) (electronically received June 24, 2026) (parties stipulating to entry of the judgment without admission of liability and subject to court approval).
[4] See Press Release, supra note 1 (situating the settlement within the Attorney General’s broader corporate practice of medicine enforcement efforts).
[5] Brief of the California Attorney General as Amicus Curiae in Support of Neither Party, Art Center Holdings, Inc. v. WCE CA Art, LLC, No. B338625 (Cal. Ct. App. Mar. 30, 2026); see also Press Release, Cal. Att’y Gen., Attorney General Bonta Files Amicus Brief in Defense of California’s Ban on Corporate Practice of Medicine (Apr. 1, 2026).
[6] Press Release, Cal. Att’y Gen., Attorney General Bonta Announces Settlement with Aspen Dental Over Corporate Practice of Dentistry and False Advertising (May 7, 2026).
[7] Cal. Health & Safety Code, Division 1.7, sections 1190-1192 (Senate Bill 351); see id., section 1191 (prohibited conduct, void provisions, and Attorney General enforcement, including attorney’s fees and costs).
[8] See People ex rel. Allstate Ins. Co. v. Discovery Radiology Physicians, P.C., 94 Cal. App. 5th 521 (2023); Epic Medical Management, LLC v. Paquette, 244 Cal. App. 4th 504 (2015).
[9] Also referred to as a continuity planning agreement, stock transfer restriction agreement, etc.
[10] Complaint for Injunctive Relief and Civil Penalties, People v. Carbon Health Technologies, Inc., No. 26STCV19242 (Cal. Super. Ct., L.A. County, filed June 17, 2026).
[11] Id.
[12] See People ex rel. State Bd. of Medical Examiners v. Pacific Health Corp., 12 Cal. 2d 156 (1938).
[13] [Proposed] Final Judgment, supra note 3; see also Complaint, supra note 12 (Chapter 11 background in the U.S. Bankruptcy Court for the Southern District of Texas).
[14] See [Proposed] Final Judgment, supra note 3.
[15] While the proposed judgment prohibits granting the MSO the right to acquire a PC’s ownership interests for its own account, the complaint does not allege that Carbon Health’s assignable option operated this way. The complaint describes the assignable option as requiring the physician-owner to transfer the PC’s shares to a physician of the MSO’s sole choosing upon specified triggers, rather than to the MSO itself. See Complaint paragraphs 27 to 28, 31, and 36; [Proposed] Final Judgment, supra note 3.