Commitments and Contingencies

12 Months Ended

Jan. 02, 2018

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

Commitments and Contingencies

Data Security Incident

Overview

On June 28, 2016, the Company announced that a data security incident compromised the security of the payment information of some customers who used debit or credit cards at certain Noodles & Company locations between January 31, 2016 and June 2, 2016. The malware involved in the incident has been removed, and the Company believes that it no longer poses a risk to credit or debit cards currently being used at affected locations. The Company continues to implement additional security procedures to further secure customers’ debit and credit card information.

Card Company Assessments

In the fourth quarter of 2016, the Company recorded a charge of $10.6 million for estimated losses, at the low end of an estimated range, associated with claims and anticipated claims by payment card companies for non-ordinary course operating expenses, card issuer losses and card replacement costs for which it expects to be liable (the “Data Breach Liabilities”). However, the Company may ultimately be subject to Data Breach Liabilities that are up to $5.5 million greater than that amount.

Data Security Litigation

In addition to claims by payment card companies with respect to the data security incident, the Company was a defendant in a purported class action lawsuit in the United States District Court for the District of Colorado (the “Court”), Selco Community Credit Union vs. Noodles & Company, alleging that the Company negligently failed to provide adequate security to protect the payment card information of customers of the plaintiffs and those of other similarly situated credit unions, banks and other financial institutions alleged to be part of the putative class, causing those institutions to suffer financial losses (the “Selco Litigation”). The complaint in the Selco Litigation also claimed the Company was negligent per se based on alleged violations of Section 5 of the Federal Trade Commission Act and sought monetary damages, injunctive relief and attorneys’ fees. On July 21, 2017, the Court granted a Motion to Dismiss in the Selco Litigation in favor of the Company. A notice of appeal of the dismissal was filed on August 15, 2017. On November 2, 2017 a mediation was held and a settlement, which was funded entirely by insurance proceeds, was reached, which resulted in a dismissal of the appeal and a resolution of the Selco Litigation on November 20, 2017.

Fees and Costs

The Company has incurred fees and costs associated with this data security incident, including legal fees, investigative fees, other professional fees and costs of communications with customers. The Company expects to continue to incur significant fees and costs associated with the data security incident in future periods, consisting primarily of liabilities to a payment card company that are not covered by insurance for which the Company has already recorded a charge of $10.6 million of which a portion remains to be paid (see Note 2, Supplemental Financial Information).

Insurance Coverage

As discussed above, to limit its exposure to losses arising from matters such as the data security incident, the Company maintained at the time of the incident and continues to maintain data privacy liability insurance coverage. This coverage, and certain other customary business insurance coverage, has reduced the Company’s exposure related to the data security incident.

General

It is possible that losses associated with the data security incident could have a material adverse effect on the Company’s results of operations in future periods. The Company will continue to evaluate information as it becomes known and will record an estimate for additional losses at the time or times when it is probable that an additional loss, if any, will be incurred and the amount of any such loss is reasonably estimable.

Delaware Gift Card Litigation

As previously disclosed in prior reports filed with the SEC, the Company is named as a defendant in an action filed in the Superior Court of Delaware in New Castle County (the “Court”), entitled The State of Delaware, William French v. Card Compliant, LLC, et. al. The case was filed under seal in June 2013 and was unsealed on March 26, 2014. The complaint in this case alleges that a

number of large retailers and restaurant companies, including the Company, knowingly refused to fulfill obligations under Delaware’s Abandoned Property Law by failing to report and deliver “unclaimed gift card funds” to the State of Delaware, and knowingly made, used or caused to be made or used, false statements and records to conceal, avoid or decrease an obligation to pay or transmit money to Delaware in violation of the Delaware False Claims and Reporting Act. The complaint seeks an order that the Company cease and desist from violating the Delaware Abandoned Property Law, monetary damages (including treble damages under the False Claims and Reporting Act), penalties and attorneys’ fees and costs. On November 23, 2015, the Court ruled on a motion to dismiss the complaint. While the Court granted the motion to dismiss with respect to a claim alleging that the defendants intended to defraud the government or willfully concealed property owed to the government and for which a certificate or receipt was provided, it did not dismiss the other claims alleging that the defendants knowingly made false statements to avoid transmitting money to the government. The trial date with respect to this matter is set for May 21, 2018. The defendants have filed a motion for summary judgment in the case. A motion and supplemental motion for summary judgment have been filed on behalf of the Company. Oral argument on the motion for summary judgment was held on November 8, 2017 and the motion is now with the Court for ruling. In 2015 the Company recorded a loss contingency accrual based on a reasonable estimate of the probable losses that might arise from this matter; this loss contingency accrual did not have a material effect on our results of operations. However, the Company may ultimately be subject to greater losses resulting from the litigation. The Company intends to continue to vigorously defend this action.

Other Matters

In the normal course of business, the Company is subject to other proceedings, lawsuits and claims. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of January 2, 2018. These matters could affect the operating results of any one financial reporting period when resolved in future periods. The Company believes that an unfavorable outcome with respect to these matters is remote or a potential range of loss is not material to its consolidated financial statements. Significant increases in the number of these claims, or one or more successful claims that result in greater liabilities than the Company currently anticipates, could materially and adversely affect its business, financial condition, results of operations or cash flows.

Employment Agreements

In July 2017, the Company entered into an employment agreement with its Executive Chairman, Paul Murphy (the “Murphy Agreement”). The agreement does not have an initial term, the agreement will be effective until Mr. Murphy’s employment is terminated by the Company with or without “cause” or by Mr. Murphy for any reason. If Mr. Murphy's employment is terminated by the Company without “cause” (as defined in the Murphy Agreement) prior to the fourth anniversary of the effective date, he is entitled to receive compensation equal to 12 months of his then-current base salary, payable in equal installments over 12 months and reimbursement of “COBRA” premiums for as long as he and, if applicable, his dependents are eligible for COBRA from the Company. The severance payments are conditioned upon Mr. Murphy entering into a mutual release of claims with the Company.

In September 2017, the Company entered into an employment agreement with its Chief Executive Officer, Dave Boennighausen (the “Boennighausen Agreement”). The agreement has an initial term of three years and automatically renews at the end of the initial term and on each anniversary thereafter for a period of one year unless canceled by either party within 90 days of the end of the initial term or anniversaries thereof. Under the Boennighausen Agreement, if Mr. Boennighausen’s employment is terminated by the Company without “cause” or by Mr. Boennighausen with “good reason,” (as such terms are defined in the Boennighausen Agreement) he is entitled to receive compensation equal to 12 months of his then-current base salary, payable in equal installments over 12 months, a pro rata bonus for the year of termination and reimbursement of “COBRA” premiums for as long as he and, if applicable, his dependents are eligible for COBRA from the Company. The severance payments are conditioned upon Mr. Boennighausen entering into a mutual release of claims with the Company.