A California state appellate court is set to consider a case that will affect whether nonphysician entities, such as private equity firms, that purchase a medical practice’s tangible assets would be allowed to fire a physician owner who exercised independent clinical judgment.
The appeal before the court has the potential to have widespread impact on the interpretation of a century-old California law that restricts the corporate practice of medicine, a statute that has continued to evolve as the healthcare industry has changed over the past 100 years.
The issue is especially relevant as medicine has seen an influx of private equity over the past decade. In that time, one analysis shows that there’s been a sixfold increase of private equity firms investing in physician practices: 484 in 2021, up from 75 in 2012.
In an amicus brief, the California Medical Association (CMA) doesn’t weigh in on the outcome of the direct question the private equity firm is appealing regarding an order creating a receivership to oversee the medical practice that is being disputed in the case, Art Center Holdings Inc. et al v. WCE CA Art LLC et al. in the California Court of Appeal, Second District.
Instead, the CMA brief notes that the basis for the receivership is a Los Angeles Superior Court finding that a friendly professional corporation structure “resulted in lay managers improperly controlling a clinical aspect of a medical practice.” The brief says the lower court was right in that assessment and notes that the corporate practice of medicine law “must be applied with precision to avoid unintended consequences in the industry.”
The brief explains that “physicians for decades have aligned with hospitals and other nonphysician healthcare providers to coordinate care and improve efficiencies for the betterment of patients” and that courts and regulators have scrutinized these arrangements to ensure that non physicians are not controlling clinical aspects of a medical practice.
Further, the brief tells the court that when it comes to the corporate practice of medicine “enforcement needs to be precise to weed out friendly [professional corporation] structures that run counter to its purpose of protecting physician independence and medical decision-making without forestalling the free flow of market forces that innovate and advance alignments of the delivery of medical care for the benefit of the public and patients.”
The Litigation Center of the American Medical Association and State Medical Societies provided financial support for the CMA’s amicus brief. This case also will be the focus of a June 7 Litigation Center education session during the 2026 AMA Annual Meeting in Chicago.
Private equity physician firing crossed line
The Art Center Holdings case was filed after a private equity firm fired the physician owner of a medical corporation who refused to fire an employee physician in the practice.
The physician owner, along with other owners, had sold their interest in a fertility practice that they founded, owned and operated for 20 years to a private equity firm. The fertility practice’s nonclinical assets were to be owned by an ordinary corporation that would provide nonclinical management and administrative support. The medical practice continued to exist under a separate professional medical corporation wholly owned by one of the original founding physicians and “friendly” to the private equity firm through a pair of contracts between the physician owner and the private equity firm.
The physician owner separately contracted with the private equity firm to provide advisory services on “questions of a medico-administrative nature” and he had authority to make clinical decisions about how medical personnel were disciplined and fired. Through a separate contract called a continuity agreement, the private equity firm could replace the physician owner with a different physician of its choosing to own the fertility medical practice.
The doctors say that the private equity firm immediately put “a singular focus on extracting maximum short-term revenue from the practice, with complete disregard for the long-term sustainability of the fertility practice of its world-class reputation.” The private equity firm, among other things, demanded that the physician owner fire two of the physician employees at the fertility practice.
Ultimately, one of those two physicians quit. The other did not quit and the physician owner refused the private equity firm’s demand to fire that physician. The private equity firm terminated the physician owner’s consulting contract, which triggered the private equity firm’s right to replace him with another physician owner of the private equity firm’s choosing who would follow their orders.
In March 2024, the Los Angeles Superior Court determined that the private equity firm’s actions in replacing the physician owner of the fertility practice amounted to interference with clinical decisions, violating the California Medical Practice Act’s restriction on the corporate practice of medicine. The court noted that the contract allowed the private equity firm to remove the physician owner from his position if they disagreed with his decision and concluded that having the contractual ability to remove the physician gave the private equity firm “undue control over the doctor.”
The court further said even the presence of the removal agreement violates California’s ban on the unlicensed practice of medicine because medical doctors are placed in an untenable position.
Learn more with the AMA about how the momentum to curb corporate influence in healthcare is growing at the state level.
Court needs to strike balance
The CMA brief says the appellate court should carefully evaluate whether the presence of the removal clause violates the law. According to CMA, such removal authority is common in clinical and business alignments between physicians and non-physician investors, managers and other stakeholders. The appellate court’s decision could thus affect most such alignment arrangements.
The “court’s task is perhaps to strike new ground and advance [the corporate practice of medicine] doctrine to evaluate the removal authority found in many friendly [professional corporation] structures and separate when it is permissible and when it results in unlawful control over the practice of medicine,” the CMA brief says. “Erecting rigid barriers in the enforcement of [the corporate practice of medicine statute] could have the unintended consequence of stifling innovation and the evolution of healthcare, resulting in significant disruption to many current physician alignments.”
Rather than establish a categorical prohibition of friendly professional corporation arrangements that involve a removal power, the CMA urged the appellate court to take a fact-based approach that considers the context and circumstances of an alignment arrangement to determine whether undue influence over clinical decisionmaking has been ceded to nonphysicians.
AMA policy that was last updated in 2025 encourages physicians to consider, among other things, whether and how a corporate relationship may require them to cede varying degrees of control over practice decision-making.
Find out more about the cases in which the AMA Litigation Center is providing assistance and learn about the Litigation Center’s case-selection criteria.
