On June 26, 2026, California’s Attorney General Rob Bonta announced a $4.5 million settlement with Carbon Health Technologies, Inc., its affiliated professional medical corporations, and co-founder and former CEO, Eren Bali (collectively, “Carbon Health”), resolving alleged violations of California’s corporate practice of medicine (“CPOM”) prohibition.[11] More significant than the dollar amount, the settlement required a structural reorganization of Carbon Health’s “friendly PC” arrangements to resolve the alleged CPOM violations.[1] This post dives into the Carbon Health settlement and its implications for organizations operating under the friendly PC model in California and beyond.
Although the settlement remains subject to court approval and Carbon Health denied liability in the settlement agreement, the agreement underscores the contractual terms the Attorney General regards as problematic and the remedies California 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 or elsewhere. More than 30 other states have similar CPOM prohibitions.
The Legislative Framework and Enforcement Uptick
California has long had CPOM prohibitions. But on January 1, 2026, the state Senate passed Senate Bill 351, which strengthened California’s CPOM framework as it applies to hedge fund and private equity involvement in physician and dental practices. Most notably, the bill voids noncompliant contract terms, prohibits private equity and hedge fund interference with clinical judgment, and authorizes the Attorney General to seek injunctive relief, attorneys’ fees, and costs.[2]
In the wake of this passage, there have been several notable developments that predate the Carbon Health Settlement. First, the Attorney General filed an amicus curiae brief in Art Center Holdings, Inc. v. WCE CA Art, LLC, a dispute between a physician practice owner and its private equity-backed management services organization (MSO) pending before the Second District Court of Appeal. The California AG urged the appellate court to affirm a trial court holding that contractual provisions allowing the MSO to replace the practice’s physician-owner violate California’s CPOM prohibition.[3] Then, on May 7, 2026, the Attorney General announced a $2.3 million settlement with Aspen Dental involving the corporate practice of dentistry and allegations of false advertising.[4] The Carbon Health settlement is the third in this trio of noteworthy developments and went the furthest by requiring Carbon Health’s corporate restructuring.
Typical Friendly PC Structure
California prohibits lay people or entities from owning or controlling a medical practice, and a non-physician business cannot legally own a professional medical corporation (PC). In a traditional “workaround” that has become known as 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). Under the MSA, the MSO provides extensive administrative and operational support to the PC and is paid for its services. Although California law does not prohibit an MSO from managing the non-clinical, business aspects of a medical practice, the PC and its physicians must retain unfettered control and authority over the practice of medicine, and MSOs may not interfere with medical activities or the physicians’ medical judgment.[5] Historically, the MSAs governing friendly PC practices have also typically prohibited PC termination of the MSO without cause and limited termination to for-cause misconduct or inadequate provision of the contracted business and administrative services.
In the typical friendly PC, physician-owners of the PC also enter into “succession agreements” with the MSO under which the physician owner must transfer his or her shares of stock of the PC to another licensed physician upon the physician’s death, disability, loss of medical license, conviction of a crime, or similar triggering events that would preclude further medical services on the part of the physician. Further, most MSAs require the PCs to obtain management services exclusively from the MSO.[6]
Carbon Health’s Original Structure and Restructure Under the Settlement
Carbon Health’s practice had most of the features discussed above, and number of other features that raised concerns on the part of the Attorney General. The Attorney General alleged that Carbon Health Technologies, Inc. (“CHTI”) served as the MSO to a network of PCs operating under the “Carbon Health” brand and that the operative MSAs unlawfully 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 AG also asserted that provisions requiring the practice to obtain exclusive management services from the MSO were unlawful as was a provision that provided the MSO with an assignable option that permitted it to cause the stock of a PC to be transferred to a physician of the MSO’s choosing if (i) the MSA with that PC was terminated, expired, or not renewed, or (ii) the MSO believed the physician-owner’s continued stock ownership would impair its ability to provide services. The AG also took issue with the MSO’s security interest in Carbon Health shares. The AG alleged that these MSA provisions, individually, and especially collectively, rendered the medical practices “captive” to the MSO in that their very existence and ownership depended entirely on the MSO’s discretion.[7] The AG alleged that such a level of control is functionally equivalent to non-physician ownership in violation of California’s CPOM prohibition.[8]
In addition to imposing $4.4 million in civil penalties against the Carbon Health entities and a separate $100,000 penalty against Mr. Bali individually[9], the judgment pursuant to the settlement permanently enjoins defendants from engaging in the corporate practice of medicine and specific prohibited arrangements.[10] These include:
- A revolving credit agreement requiring the PC to obtain financing only from the MSO at above-market rates.
- Provisions granting the MSO absolute authority over advertising, payor negotiations, equipment selection, and especially the hiring, firing, and compensation of clinicians; and
- provisions granting the MSO functional “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.”
It is worth noting that the settlement agreement includes a carve-out for the second prohibition that allows the MSO to take a first-priority lien in practice assets subject to conventional lender restrictions. Thus, ordinary secured lending on market terms should remain acceptable. But financing as a backdoor mechanism to control medical staffing and medical decision-making is not. The judgment also enjoins Carbon Health from “engaging in the corporate practice of medicine,” including the arrangements enumerated above, and separately enjoins the advertising, consumer-contract, and billing practices alleged in the complaint. For all intents and purposes, the injunction necessitates a significant restructuring of Carbon Health in order to comply.
The Future: In California and Beyond
The Attorney General’s willingness to require corporate reorganization goes well beyond prior actions and can dramatically alter the parties’ arrangement in a friendly PC structure. This raises concerns for stakeholders, especially where the MSO has invested significant capital in a PC’s growth and operations. The type of reorganization compelled here can reduce the MSO’s anticipated return and hinder its ability to ensure it recoups its investment. It is also noteworthy that the AG named a company chief executive and founder individually, leaving physicians, executives, and investors personally exposed for violations.
Medical practices, investors, and other stakeholders outside California should pay attention to this settlement. California is often at the forefront of enforcement waves. Where California goes, other states follow, and more than 30 other states have enacted similar CPOM prohibitions. AG offices often copy legal theories, investigative tactics, and settlement frameworks from other AG offices. This is especially true for multistate operations where the private equity side has arrangements with multiple practices in multiple states. Practices should assess compliance with each state’s requirements now and ensure that governance, operational control provisions, and contract terms comply.
Provisions to Review
Provisions that medical practices and investors should review (whether currently operating as a friendly PC or considering this arrangement) include:
- Representations to consumers involving advertising, billing, and informing patients of the identity of the PC that owns and operates the practice.
- Financing arrangements, with an eye towards eliminating exclusive and above-market financing that could be perceived as a control mechanism.
- Succession provisions, such as security interests in PC shares, assignable options, and stock transfer rights. Provisions giving the MSO unfettered authority to replace the physician-owner or limit the physician-owner’s ability to exit without forfeiting the practice should be viewed with suspicion.
- Equity and buyout terms, such as nominal purchase prices for the physician’s interest, which can create a perception that the practice is “captive” to and functionally controlled by the MSO.
Stakeholders should consult qualified legal counsel to review these provisions. State laws vary as do the specific MSAs and factual situations of a practice. There are ways to structure these arrangements and remain profitable and compliant, but caution is warranted.
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), available at https://oag.ca.gov/news/press-releases/attorney-general-bonta-announces-first-its-kind-settlement-carbon-health-and-its
[2] Cal. Health & Safety Code, Division 1.7, sections 1190-1192 (Senate Bill 351); id., section 1191 (prohibited conduct, void provisions, and Attorney General enforcement, including attorney’s fees and costs).
[3] Brief for the California Attorney General as Amicus Curiae, 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), available at https://oag.ca.gov/news/press-releases/attorney-general-bonta-files-amicus-brief-defense-california%E2%80%99s-ban-corporate
[4] 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), available at https://oag.ca.gov/news/press-releases/attorney-general-bonta-announces-settlement-aspen-dental-over-corporate-practice
[5] 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).
[6] 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).
[7] Id.
[8] People ex rel. State Bd. of Medical Examiners v. Pacific Health Corp., 12 Cal. 2d 156 (1938).
[9] [Proposed] Final Judgment and Permanent Injunction, People v. Carbon Health Technologies, Inc., No. 26STCV19242 (Cal. Super. Ct., L.A. County); see also Complaint.
[10] [Proposed] Final Judgment.
[11] [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).
