Two ex-employees of Merrill Lynch have taken the giant financial services company to court over restrictive noncompete clauses.

Michael Bradshaw and his son Philip Bradshaw, both San Diego-based financial advisors, had led a Merrill team that managed “in the hundreds of millions of dollars” in client assets, according to the plaintiffs’ lead attorney, Erwin J. Shustak, a managing partner at Shustak Reynolds & Partners in San Diego.

The elder Bradshaw started at Merrill back in 1974. Philip Bradshaw joined his father’s team in 2006. In 2019, Michael Bradshaw entered the firm’s retirement/transition program, according to the attorney, which allowed him to gradually move his client accounts to his son and another unnamed team member. But in November 2022, Philip Bradshaw was terminated. Michael Bradshaw then resigned in early January 2023.

The exact reasons for the younger Bradshaw’s termination have not been made public, but Shustak said they ostensibly were related to a “failure to meet performance expectations, resulting from failure to follow firm procedures regarding servicing client accounts.” He called these charges pretextual, meaning they are false or dubious, in that they “seem to be very minor and lack substance.”

At issue is whether the Bradshaws can continue their careers in financial advisory services at another firm. Both had signed employment agreements that enjoined them from “using or disclosing any information” learned while at Merrill and from soliciting new business from accounts they had served while at Merrill.

These provisions “clearly violate California public policy,” he said, referencing Section 16600 of the California Business and Professions Code, “which makes those anti-competitive provisions unlawful in California when applied to a California resident,” said Shustak.

Moreover, he stated that the Bradshaws did not in fact “take any names or other information, or any documents,” from Merrill Lynch.

The suit was filed in the U.S. District Court for the Southern District of California, along with a simultaneous arbitration claim with the Financial Industry Regulatory Authority.

As of this writing, Merrill Lynch has not actually pursued a noncompete claim against the Bradshaws. But according to Shustak, Merrill did demand that Philip Bradshaw pay the firm $532,000 before taking a job somewhere else. “There is no note, no debt,” said Shustak. “The ML attorneys told me this was essentially a penalty he had to pay if he wants to do what he is legally entitled to do in California.”

Besides refusing to pay that penalty, which they deem unjustified, the plaintiffs are seeking a declaration that Merrill Lynch has no valid claims against them and that they did not violate the Defend Trade Secrets Act of 2016, which covers misappropriations of proprietary trade secrets.

“We initiated the federal court action and a Finra case on behalf of our clients to ensure they are not interfered with as they engage in lawful, protected competition,” said Shustak. “Our concern is that their transition to another firm not be hindered by ML, which has a history of trying to enjoin former brokers from legally competing.”

Though no announcement has been made yet, Finra’s BrokerCheck website indicated that the Bradshaws had registered with Raymond James.

Most noncompete cases seem to go the other way, with the former employer accusing an ex-employee of violating the terms of employment. But in this case, Shustak acknowledged, the lawsuit is a “proactive filing” to prevent Merrill Lynch from even trying to interfere with the Bradshaws’ “ability to earn a living and compete fairly and legally,” he said.

Such proactive claims are not unprecedented, however. “While not commonplace, this is not unusual in our experience and has been done in the past, whenever transitioning brokers are concerned they may be unfairly treated, or their transition interfered with, by their former firms,” said Shustak.

Sharron Ash, chief litigation counsel at Hamburger Law in Englewood, N.J., who is not connected with the case, sounded a more cautious note. “When a proactive filing is made such as this one, [it] is often part of a broader strategy,” she said, adding that if it’s “used as a negotiating tool, it can be one that backfires.”

Such proactive maneuvers should not be undertaken lightly, she said. “An advisor considering this type of strategy should have a full 360 degree view of the landscape, and only take on the distraction and expense that arises from litigation in such an intentional way if more business-minded alternatives have failed,” she said.

Ash further observed that this kind of action can generate an equal and opposite reaction, leading to higher expenses and unsatisfactory outcomes. “A dispute is sometimes unavoidable, and if so, there can certainly be advantages to being the first to file,” she acknowledged. “But we’ve seen cases like this where the advisor spends six figures on litigation they initiated and, in the worst of those cases, it was a wholly unnecessary added cost… Parallel litigation ensued anyway [and] in the end, they ended up paying for litigating two cases rather than one.”