17. Litigation, Commitments and Contingencies

Litigation

The Company is involved in a number of lawsuits, claims, investigations and proceedings, including those specifically identified below, consisting of intellectual property, employment, consumer, commercial and other matters arising in the ordinary course of business. In accordance with ASC 450 “Contingencies,” the Company has made accruals with respect to these matters, where appropriate, which are reflected in the Company’s financial statements. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

Perrin v. Papa John’s International, Inc. and Papa John’s USA, Inc. was a conditionally certified collective and class action filed in August 2009 in the United States District Court, Eastern District of Missouri (“the Court”), alleging that delivery drivers were not properly reimbursed for mileage and expenses in accordance with the Fair Labor Standards Act (“FLSA”). Approximately 3,900 drivers out of a potential class size of 28,800 opted into the action. In December 2013, the Court granted a motion for class certification in five additional states, which added approximately 15,000 plaintiffs to the case. Though the Company denied any wrongdoing in this matter, the parties reached a settlement in principle, which was preliminarily approved by the Court in September 2015. With the preliminary settlement agreement, the Company recorded an expense of $12.3 million in June 2015 under the provisions of ASC 450, Contingencies. This amount is separately reported as a legal settlement in the consolidated statements of income. The Court issued its final order approving the settlement on January 12, 2016 and payments were distributed. The settlement amount was finalized and paid in 2016 and the expense was adjusted accordingly with a reduction of approximately $900,000.

Leases

We lease office, retail and commissary space under operating leases, which have an average term of five years and provide for at least one renewal. Certain leases further provide that the lease payments may be increased annually based on the fixed rate terms or adjustable terms such as the Consumer Price Index. We also lease the tractors and trailers used by our distribution subsidiary, (“PJFS”), for an average period of seven years. PJUK, our subsidiary located in the United Kingdom, also leases certain retail space, which is primarily subleased to our franchisees. Beginning in 2016, we reported this sublease rental income on a gross basis in our consolidated statements of income. Prior to 2016, this sublease rental income was reported on a net basis with lease expense. Total sublease payments for sites to our franchisees and other third parties, the majority of which were with PJUK, were $7.4 million, $7.5 million and $6.5 million in 2017, 2016 and 2015, respectively.

Total lease expense was $45.0 million in 2017 and in 2016. Total lease expense, net of sublease payments received, was $36.2 million in 2015.

Future lease costs and future expected sublease payments as of December 31, 2017, are as follows (in thousands):


			Future
			Expected
	Gross Lease		Sublease
Year	Costs		Payments
2018	$	45,421	$	8,072
2019		38,807		7,969
2020		30,956		7,672
2021		24,756		7,307
2022		17,896		6,972
Thereafter		56,234		41,568
Total	$	214,070	$	79,560

The Company’s headquarters facility is leased under a capital lease arrangement with the City of Jeffersontown, Kentucky in connection with the issuance of $80.2 million in Industrial Revenue Bonds. The bonds are held 100% by the Company and, accordingly, the bond obligation and investment and related interest income and expense are eliminated in the consolidated financial statements resulting in the Company’s net investment cost being reported in net property and equipment.

Our Quality Control Center in Georgia is leased under a capital lease arrangement with Acworth, GA/Cherokee County in connection with a tax abatement incentive involving the sale and lease back of equipment between PJFS and the Cherokee County Development Authority. The arrangement is structured so that no cash will be exchanged and no lease payments are externally due. The assets associated with the lease arrangement are recorded within the Company’s consolidated balance sheet.

As a result of assigning our interest in obligations under property leases as a condition of the refranchising of certain restaurants, we are contingently liable for payment of approximately 49 domestic leases. These leases have varying terms, the latest of which expires in 2022. As of December 31, 2017, the estimated maximum amount of undiscounted payments the Company could be required to make in the event of nonpayment by the primary lessees was $4.4 million. The fair value of the guarantee is not material.