California AG Settlement Again Targets Friendly PC Model: What MSOs Need To Know Now

Highlights

• California Attorney General (AG) Rob Bonta announced on June 26, 2026, a $4.5 million settlement with Carbon Health Technologies Inc., its affiliated medical groups and co-founder Eren Bali that requires a complete restructuring of the company's friendly professional corporation (PC) model and attributes personal liability to Bali.
• The settlement identifies core features of the management services organization (MSO)-PC structure, including assignable option agreements, captive PCs, exclusive above-market financing and comprehensive MSO operational control, as evidence of unlawful corporate practice of medicine (CPOM).
• This settlement follows the Aspen Dental settlement and AG amicus brief in Art Center Holdings, confirming that the AG's office has developed an enforcement pipeline targeting both CPOM and corporate practice of dentistry structures in California.
• Importantly, this settlement does not hold that all friendly PC models are illegal in California; rather, it signals that the AG's office is focused on overt acts of unlawful control over medical practices. Healthcare companies that utilize the friendly PC and MSO structure should conduct compliance reviews to ensure their documents and governance arrangements comply with state law.

From the West Coast Healthcare Desk

California Attorney (AG) General Rob Bonta on June 26, 2026, announced a settlement with Carbon Health Technologies Inc., its affiliated medical groups, and co-founder and former CEO Eren Bali (collectively, Carbon Health) resolving allegations that the company violated California's prohibition on the corporate practice of medicine (CPOM), engaged in false advertising, used unlawful consumer contracts, and improperly billed patients and insurance providers.¹

The settlement and press release do not declare "friendly professional corporation" (PC) structures to be de facto violations of CPOM. Instead, they make clear that structures that fall outside the confines of California law will face heightened scrutiny. With his recent amicus brief in Art Center Holdings and the Aspen Dental settlement in May 2026, AG Bonta signaled continued interest in these arrangements.

This Holland & Knight alert analyzes the alleged CPOM violations, summarizes the key settlement terms and discusses the implications for management services organization (MSO)-PC structures operating in California. Now is the time for healthcare companies to reassess their corporate structures, management agreements and governance arrangements. Enforcement is accelerating, and compliance reviews should not wait.

The Alleged CPOM Violation

Carbon Health, founded in the San Francisco Bay Area in 2015, provides management services to more than 80 clinics across eight states, including 54 in California. Fueled by nearly $600 million in venture capital, the company became a target of the AG's office, which alleged that Carbon Health employed what the complaint termed an "unlawful playbook" with each affiliated medical group, using contractual mechanisms to render the physician-owned PCs entirely "captive."

The AG identified the following structural features as constituting unlawful corporate practice of medicine:

• Comprehensive Operational Control. The MSO agreement between Carbon Health and each California PC granted Carbon Health authority over virtually all aspects of practice operations, including advertising, billing, finances, patient records, selection of medical equipment and, most critically, the hiring, firing and compensation of licensed medical professionals. The AG viewed this comprehensive delegation as effectively extinguishing the PCs' independent existence.
• Financial Captivity. Carbon Health required PC consent for any asset purchase, debt or contract exceeding $1,000, as well as any amendment to corporate governance documents. Revolving credit agreements required the PCs to borrow exclusively from Carbon Health at above-market interest rates. Taken together, these arrangements ensured that the PCs could not operate independently and remained financially dependent on the MSO.
• Assignable Option Agreements and Security Interests. Carbon Health held assignable option agreements providing that if the MSO agreement terminated, or if Carbon Health determined that a physician-shareholder's continued ownership would impair Carbon Health's ability to provide services, ownership of the PC would transfer to a physician of Carbon Health's choosing. Typically, these agreements allow for the friendly physician to identify or assist with identifying a successor, but Carbon Health, much like the MSO in Art Center Holdings, had complete control over this part of a future transition. Carbon Health also held a security interest in each physician-owner's shares. The physician-owner effectively served at the MSO's pleasure.
• Board-Level Involvement in Clinical Matters. The complaint further alleges that Carbon Health's board of directors, composed of unlicensed individuals, discussed matters reserved for licensed physicians, including clinician staffing, billing complexity, payer contracting, and clinician performance and incentive structures. Public statements by Bali and other executives confirmed the intent: "We're going to own the clinics … own the brand … own the services … own every piece of it."

Viewed as a whole, the AG concluded that the PCs were not independent medical practices in any meaningful sense but rather captive entities whose existence and ownership depended entirely on Carbon Health's discretion. This, the AG argued, is the defining feature of an unlawful CPOM arrangement under California law.

Key Settlement Terms

The settlement, filed in Los Angeles County Superior Court and subject to court approval, includes the following key terms:

Civil Penalties

• $4.4 million against Carbon Health entities ($4.02 million as a prepetition general unsecured claim and $375,000 as an administrative expense claim in the company's Chapter 11 bankruptcy proceeding)²
• $100,000 civil penalty against Eren Bali personally

Permanent Injunctive Relief

The settlement permanently enjoins Carbon Health from:

• CPOM, including entering into management agreements that grant the MSO complete authority over advertising, payer negotiations, equipment selection and hiring/firing/compensation of licensed medical professionals
• granting the MSO any ownership interest in a PC, including through assignable option agreements
• exclusive financing arrangements requiring PCs to borrow solely from the MSO at above-market rates (though the MSO is permitted a first-priority lien with conventional lender restrictions)
• unfair consumer contracts, including failure to advise patients of automatic credit card charging
• improper billing practices and false or misleading advertising regarding in-network insurance status

Organizational Restructuring Requirement

The most notable element of the settlement is the requirement that Carbon Health restructure its corporate organization so that the MSO no longer controls or holds ownership interests in physician-owned medical practices. Because Carbon Health held even prospective interests in the PCs through assignable option contracts, the AG announced in his press release that "Carbon Health must change its organizational structure so that a non-medical management company can no longer control or have ownership interests in physician-owned medical practices. Physicians must have independent control over medical decisions and how the practices operate."

This is not merely a prospective compliance requirement – it mandates unwinding existing arrangements.

Implications for Friendly PC Structures in California

The Carbon Health settlement matters not just for what it resolves, but for what it signals about the AG's posture toward the friendly PC model. First, the settlement makes clear that assignable options are problematic. The AG's position – consistent with the Art Center Holdings amicus brief filed in April 2026³ – is that stock transfer restriction agreements and assignable option agreements allowing the MSO to replace the physician-owner at will are themselves indicia of unlawful CPOM. The settlement permanently enjoins such arrangements.

Second, the settlement suggests that the question of control requires consideration of the totality of the circumstances but that certain financing restrictions demonstrate de facto control. Revolving credit arrangements requiring PCs to borrow exclusively from the MSO at above-market rates are treated as financial captivity. The settlement carves out the MSO's ability to hold a first-priority lien subject to conventional lender restrictions – suggesting that standard secured-lending arrangements may survive but exclusive captive-financing structures will not. Even authority over ostensibly "non-clinical" functions – advertising, payer negotiations, equipment selection – is treated as indicia of unlawful control when combined with financial captivity. MSO agreements must be carefully calibrated to preserve meaningful physician independence across all operational domains.

Finally, the settlement demonstrates that restructuring will be required if enforcement action is taken. The settlement does not merely impose forward-looking constraints – it requires unwinding existing arrangements. The AG may demand not only future compliance and financial penalties, but retroactive remediation as well.

The AG's Enforcement Trajectory: A Pattern, Not an Anomaly

The Carbon Health settlement must be understood in the context of an accelerating enforcement trajectory. In rapid succession over three months, the AG's office has:

• filed an amicus brief in Art Center Holdings defending California's CPOM prohibition and arguing that stock transfer restriction agreements are themselves CPOM violations (April 2026)
• secured the Aspen Dental settlement for corporate practice of dentistry (CPOD) violations, including first-of-its-kind injunctive terms and a 36-month compliance monitor (May 2026)⁴
• announced the Carbon Health settlement targeting the friendly PC model with mandatory organizational restructuring (June 2026)

Several observations emerge from this pattern:

• Institutional Expertise. Three major enforcement actions in three months indicates the AG's Healthcare Rights and Access Section has developed significant institutional knowledge and a mature case pipeline. Additional investigations are likely underway.
• Both CPOD and CPOM Structures Are Targets. The AG is willing to pursue dental and medical structures alike. No sector of healthcare that relies on MSO-PC arrangements is immune.
• Bankruptcy Is Not a Shield. Carbon Health's Chapter 11 filing did not prevent the AG from pursuing enforcement. The settlement navigated the bankruptcy process, with penalties split between prepetition unsecured claims and administrative expense claims. Companies cannot use bankruptcy as a strategy to evade CPOM enforcement.
• Personal Liability Is on the Table. The $100,000 civil penalty against Bali personally signals that the AG is willing to look through corporate structures and hold individual executives accountable, particularly those who direct or enable unlawful corporate control of medical practices.

AG Bonta's press release frames this settlement as part of "broader efforts to protect patients from unlawful corporate influence over medical decision-making." The pattern is clear: This is not a one-off action but a sustained enforcement initiative.

Action Items for MSOs and Healthcare Platforms

Given the AG's enforcement posture, companies utilizing friendly PC or MSO-PC structures in California should consider the following:

Immediate

• Obtain Experienced Counsel in California. The waters in California compliance are currently choppy and everchanging as the AG's office continues its expansion of CPOM oversight. Now, more than ever, engaging competent legal counsel with experience navigating California healthcare regulatory matters is essential.
• Review Assignable Option Agreements. Assess whether existing stock transfer restriction agreements, put/call options or assignable option agreements give the MSO the unilateral ability to replace physician-owners. Consider restructuring or eliminating these arrangements.
• Audit MSO Agreement Scope. Determine whether management agreements grant the MSO authority over hiring, firing or compensation of licensed medical professionals or any function that could be characterized as "complete authority" over practice operations.
• Evaluate Financing Arrangements. Identify any exclusive lending arrangements between the MSO and affiliated PCs. If PCs are required to borrow solely from the MSO at above-market rates, restructure these arrangements to permit arm's-length financing.

Near-Term

• Governance Review. Examine board and management structures to confirm that unlicensed individuals are not making decisions reserved for licensed physicians – including clinician staffing, clinical incentive programs and payer contracting strategy.
• Document Physician Independence. Ensure that physician-owners have genuine, documented authority over clinical decision-making and practice operations. Consider establishing formal physician governance committees with real authority.
• Assess Financial Independence of PCs. Confirm that affiliated PCs have meaningful financial autonomy – including the ability to make routine operational expenditures without MSO approval and obtain financing from third-party lenders.

Long-Term

• Structural Reassessment. Evaluate whether existing friendly PC structures can withstand regulatory challenge given the AG's current posture. Consider transitioning to models that provide more robust physician independence while preserving legitimate management support functions.
• Transaction Diligence. For dealmakers and investors, the Carbon Health settlement underscores the importance of rigorous CPOM compliance diligence in healthcare transactions. Structural risk should be priced, and remediation plans should be built into transaction timelines.
• Monitor Enforcement Developments. Track the AG's enforcement activity and any judicial decisions on the Art Center Holdings amicus positions. The law in this area is evolving rapidly, and structures that are compliant today may require adjustment as the AG's interpretive framework crystallizes through further settlements and litigation.

Conclusion

The Carbon Health settlement is a landmark enforcement action – the first time the California AG has secured a settlement targeting the friendly PC model in the medical practice context with mandatory structural restructuring. Combined with the Aspen Dental settlement and Art Center Holdings amicus brief, it confirms a coordinated, multifront enforcement strategy against corporate structures the AG views as undermining physician independence.

For healthcare companies, MSOs, investors and transactional counsel operating in California, the message is clear: The enforcement environment is shifting. Proactive compliance review is no longer optional. Companies that restructure problematic contractual arrangements and document compliant governance practices now will be best positioned to navigate the regulatory landscape ahead.

Footnotes

1. See People v. Carbon Health Technologies, Inc., et al., Case No. 26STCV19242, Los Angeles County Superior Court (filed June 26, 2026).

2. Carbon Health filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of Texas; the plan was confirmed May 29, 2026, and became effective June 15, 2026.

3. See Art Center Holdings, Inc. v. WCE CA Art LLC, California Court of Appeal, Second Appellate District (AG amicus brief filed April 2026).

4. See People v. Aspen Dental Management Inc. (May 2026) (settlement including $2 million in penalties, $300,000 restitution and 36-month compliance monitor).