United States Court of Appeals

Fifth Circuit



## FILED

December 27, 2004

Charles R. Fulbruge III

Clerk 

## In the 

# United States Court of Appeals

for the Fifth Circuit

_______________



### m 03-11341

_______________



### R HONDA 

### S ANCHEZ



### ,

Plaintiff-Appellee,

VERSUS



### V ERIO 

### I NC



### ., ET AL



### .,

Defendant,



### V ERIO 

### I NC



### .,

Defendant-Appellant,

_________________________

Appeal from the United States District Court

for the Northern District of Texas



### m 3:01-CV-972-N

_________________________2

Before J ONES , S MITH , and S TEWART

, Circuit Judges.

J ERRY E. S MITH , Circuit Judge: *

A jury returned a

verdict in favor of

Rhonda Sanchez, finding th at her former

empl o yer, Verio Inc. (“Verio”), breached its

contractual obligation to vest her stock

options fully on h er termination. Verio

appeals, contending that the stock-opti on

agreement unambiguously requires a condition

not present in Sanchez’s case before triggering

accelerated vesting, and thus the district court

erred in submitting the case to t he jury. We

agree. Because the agreement unambiguously

does not require accelerated ve st ing in

Sanchez’s ci

rcumstances, we reverse and

render judgment in favor of Verio.

I.

Sanchez was employed by Verio, an internet service provider, from February 1998 until

she was terminated in April 20 00. At f our

point s during her employment, she received

stock options from Verio. Each t ime that

occurred, she was provided with and signed a

“Notice of Stock Option Aw ard” (“Noti ce”)

that together with t h e “Stock Option Agreement” (“Agreement”) sets forth the terms and

conditions governing the vesting, exercise, and

expiration of the options.

According t o t he general vesting schedule

in the Notice, Sanchez’s stock options vested

at a rate of twenty-five percent per year, beg inning one year after issuance, with eac h

award fully vesting in four years provided that Sanchez remained employed by the company.

Pursuant to § 2(a) of the Agreement, however,

this general vesting schedule was subject to the

provisions of § 4. Section 2(a) provides:

Right to Exercise

. The Option shall be exercisable during its term in accordance with

the Vesting Schedule set out in the Notice

and the applicable provisions of the Plan

and this Option Agreement. The Option

shall be subject to the provisions of Section

4, below, relating to the exercisability o r

termination of the Option upon a corporate

event.

Section 4, captioned “ Corporate Transactions/Changes in Control/Related Entity

Dispositions,” enables, in its three subsections,

the accelerated vesting of stock options in certain enume rated (and here contested)

circumstances. The relevant part of § 4 

### S S the

provision at t he center of this dispute 

### S S is

§ 4(b), which states,

The Option shall become fully ves ted and

exercisable upon termination ofthe Continuous Status as an Employee, Director or

Consultant of the Optionee if such Continuous Status as a n Employ ee, Director or

Consultant is terminated by the Company

or a Related Entity without Cause or voluntarily by the Optionee with Good Reas o n

withi n t welve (12) months of a Change in

Control.

The issue on appeal is whether Verio breached

an obligation to vest Sanchez’s options fully

on her termination pursuant to this provision.

During her tenure, Sanchez received grants

o f options to purchase more than 40,000

shares of Verio common stock. As of the date

of her termination (April 26, 2000), 11,290 of * Pursuant to 5 TH C IR. R. 47.5, the court has determined that this opinion should not be published

and is not precedent except u nder the limited circumstances set forth in 5 TH C IR . R. 47.5.4.3

her options had vested, and 29,250 were

unvested. At the time she was terminated,

Verio was engaged in merger negotiations

with NTT Communications, Inc. (“NTT”).

After regulatory approval, the NTT/Verio

merger was executed on August 31, 2000,

more than four months afte r Sanchez was

terminated.

Having been terminated holding nearly

30,000 unvested opt i ons, Sanchez contacted

the company seeking to exercise all her options by invoking the accelerated vesting provision in § 4(b). Specifically, she claimed that

the company’s merger with NTT constituted a

“change in control” (as defined by the Agreement) occurring within twelve months of her

termination without cause, the r eby triggering

Verio’s duty under § 4(b) to vest all her op

tions fully. Verio refused, informing Sanchez

that she did not qualify for accelerated vesting

under § 4(b) because she had been terminated

before the merger.

II.

Sanchez sued in state court all e ging that

Verio had breached it s contractual obligation

to provide for accelerated vesting. Verio

removed the case to federal cou rt based on

diversity of citizenship. The parties filed

cross-motions for summary judgment in which

each contended that the Agreement unambiguously reflected its own interpretation of § 4(b).

Finding the Agreement to be susceptible to

more than one interpretation, the district court

denied both motions and set the cause for trial.

After a four day trial, the jury returned a verdict for Sanchez. Having found that Verio

“failed to comply” with the stock opti on

agreement, the jury awarded Sanchez damages of $1,945,000. 2

Verio’s primary contention is that the court

erred in finding the Agreement ambiguous and

t hus erred in submitting the case to the jury.

Beyond this th

reshold challenge, Verio also

questions the sufficiency o f the evidence; the

use of a general verdict form, as opposed t o

special interrogato ries; and the refusal to

instruct the jury to in t erpret § 4(b) in light of

the entire Agreement.

III.

The determination of whether a contract is

ambiguous is a

quest ion of law subject to d e

novo review. S ee, e.g.

, Stinnett v. Colo. Interstate Gas Co. , 227 F.3d 247, 254 (5th Cir.

2000); Ad Two, Inc. v. City & County of Denver

, 9 P.3d 373, 376 (Colo. 200 0 ). Pursuant

to a choice of law provision not contested by

either party, we apply Colorado law to determine whether the Agreemen t is ambiguous. 3

“Written contracts that are complete and free

from ambiguity will be enforced according to

their plain language.” A d Two , 9 P.3d at 376

(citing USI Props. E., Inc. v. Si mpson , 938

P.2d 168, 173 (Colo. 1997)). If, however, we

determine that t he Agreement is ambiguous,

“its interpretation becomes an issue of fact for

the trial court to decide in the same manner as

other disputed factual issues.” P e pcol Mfg.

Co. v. Denver Union Corp. , 687 P.2d 1310,

1314 (Colo. 1987) (quoting Union Rural Elec.

2 The cou r t also awarded prejudgment interest

of $545,611.12.

3 Section 13 provides that the A gr eement and

Notice “are to be construed in accordance with and

governed by the internal laws of the State of Colorado without giving effect to any choice of law rule

that would cause the application of the laws of any

jurisdiction other than the internal laws of the State

of Colorado to the rights and duties of the parties.”4

Ass’n v. Pub. Util. Comm’n

, 661 P.2d 247,

251 (Colo. 1983)).

IV.

A.

Verio contends that § 4(b) unambiguously

provides that if an employee is terminated

with o ut cause, 4 accelerated vesting is triggered

only if the termination occurred in the twelvemonth period after a corporate change in

c ontrol. Because Sanchez was terminat ed

more than four months before the cor porate

change in control was executed, Verio claims

it had no obligation to vest her options fully

upon her termination and that Ver io is therefore entitled to judgment as a matter of law.

Sanchez disagrees. She offers two interpretations of § 4(b), either of which she claims

suppo rt s the finding of ambiguity, and thus

supports the decision to submit this case to the

jury. Sanchez first contends that § 4(b) requires ac celerated vesting upon her termination without cause regardl ess of the occurrence of any corporate event. In other words,

contrary to Verio’s interpretation that § 4(b) is

a so-called “double -tri gger” ( i .e.

, accelerated

vesting only u p on both termination without

cause and termination within twelve months of

a change in control), Sanchez contends that

§ 4(b) is a “single- trigger” ( i .e.

, accelerated

vesting upon termination without cause).

According to this single-trigger theory, the

change in control provision of § 4(b) does not

mod i fy the termination without cause provision; instead, the Agree m ent provides for

accelerated vesting “ either if she was t erminated ‘without Cause,’ or she quit ‘with Good Reason within twelve (12) months of a Change

in control.’” Under this interpre t ation,

Sanchez i s entitled to accelerated vesting

based solely on the jury’s factual finding that

she was terminated without cause.

A lt ernatively, Sanchez contends that even

if § 4(b) is unambiguously a double-trigger

(requiring both termination without cause and

termination within twelve months of a change

in control), the Agreement is no netheless

ambiguous because it is uncertain whether the

term “within” requir es a change in control to

precede the termination or whether, instead, it

can follow a termination. Sanchez asserts that

“[n]othing about the plain meaning of ‘within’

i n dicates or requires that termination occur

specifically after a ‘Change in Control.’” And

because Sanchez was terminated only four

months before a change in co nt ro l did in fact

occur, she contends that t here is a fact question whether her options should have vested

on an accelerated basis given that “her termination took place ‘ within ’ twelve (12) months

of a Change in Control.”

B.

Under Colorado law, “[t]he meaning of a

contract is found by examination of the entire

instrument and not by viewing clauses or

phrases in isolation.” K

uta v. Join t Dist. No.

50(J)

, 799 P.2d 379, 392 (Col o. 1992). 5 “In

determining whether a contractual provision is

ambiguous, the instrument’s language must be

4 Verio does not challenge on appeal the jury’s

implicit finding that Sanchez was terminated without cause. 5 See also Pepcol

, 68 7 P.2d at 1314 (“An integr ated contract in the first instance is to be interpreted in its entirety with the end in view of

seeking to harmonize and giveeffect to all provisions

. . . .”); Bevsek v. Huerfano Sch. Dist.

, 728

P.2d 325, 326 (Colo. App. 1986 ) (“[A] contract

must be construed as a whole, and each provision

must be given effect.”).5

examined and cons t rued in harmony with the

plain and generall

y accepted meaning of the

words used, with reference to all of the agreement’s provisions.” F iberglass Fabricators,

Inc. v. Kylberg

, 799 P .2d 371, 374 (Col o.

1990). “Of course, ‘the mere fact that parties

differ on their interpretations does not of itself

create an ambiguity. ’ ” D orman v. Petrol

Aspen

, 914 P.2d 909, 912 (Colo. 1996) (citing

Fiberglass Fabricators

, 799 P.2d at 374).

Instead, “[t]erms used in a contract are ambiguous w hen they are susceptible to more than

one reasonable interpretation.” A d Two

, 9

P.3d 373 at 376 (emphasis added).

Despite this interpretive canon requiring interpretati on of a contract in its entire ty, the

district court focused on § 4(b) in isol ation.

Specifically, the court, in its written opinion

denying summary judgment, rea s oned as

follows:

Section 4(b) of the Agreement includes an

‘or’ that separates two clauses, but the term

‘Change of Control’ is included only in the

seco nd clause. It is possible the parties

intended for the ‘ Change of Control’ to

apply to both clauses or just to the l atter

clause, so the Agreement is susceptible to

more than one mean ing, and it is ambiguous.

When read in isolation, § 4(b) can indeed be

said to be ambiguous: It is not unreasonable

to read the “within twelve (12 ) months of a

change in control” clause of§ 4(b) as modifying both t he termination without cause

provision and the voluntarily with good reason

provision; similarly, it is not unreasonable to

read the “within twelve (12) months of a

change in control” clause as modifying only

the voluntarily with good reason provision.

But Color a do contract law, as well as the common law of contra ct s generally, requires

courts to determine ambiguity by reference to

all provisions of an instrument. 6

When read in context of the Agreement as

a whole, § 4(b ) may still be susceptible to

more than one interpretation, but in context it

is no longer suscep t ible to more than one

reasonabl e interpretation. 7 Read in light of

the entire Agreement, the pr o vision is unambiguous: Before triggering accelerated vesting, it requires (1) both termination without

cause and termination within twelve months of

a change in control ( i.e.

, it is a double-trigger);

and (2) termination without cause to occur

within the twelve-month period after a change

in control.

1.

On the threshold interpretive question

(namely, whether § 4(b) triggers accelerated

vesting merely on termination wi thout cause,

or whether it requires termination without

cause within twelve mo nt hs of a change in

6 See, e. g.

, D orman

, 914 P.2d at 912 (stating

that courts should determine ambiguity b y reference to plain language “with reference to all of the

agreem ent’s provisions”); s ee also A MERICAN J UR

ISPRUDENCE

, C ONTRACTS § 3 3 1 (2d ed. 2004)

(“When deciding whether an agreement is ambiguous, particular words should be considered, not as

if isolated from the context, but in the light of the

obligation as a w hole . . . .”); i d. (“To determine

contract ambiguity, a court looks to the entirety of

the contract.”); W ILLISTON ON C ONTRACTS § 30.5

(“In determining whether a contract is ambiguous,

the court begins with its plain l anguage . . . with

reference to all of the agreement’s provisions.”).

7 See Ad Two

, 9 P.3d at 376 (“Terms used in a

contract are ambiguous when they are susceptible

to more than one reasonable interpretat ion.”)

(emphasis added).6

control ) the reasonableness of Sanchez’s

single-trigger interpretation is b e lied by various other provisi o ns in the Agreement. Section 2(a), governing Sanchez’s “ Right to Exercise,” expressly classifies § 4 as dealing with

corporate events:

Right to Exercise

. The Option shall be exercisable during its term in accordance with

the Vesting Schedule set out in the Notice

and the applicable provisi o ns of the Plan

and this Option Agreement. T he Option

shall be subject to the provisions of Section

4, below, relating to the exercisability or

termination of the Option upon a corporate

event

.

(Emphasis added.) Thus, § 2(a) indicates that

§ 4’s t hree accelerated vesting provisions are

opera t ive on the occurrence of a “corporate

event.”

The Agreement defines “Corporate Event”

in § 3(d) to mean “the occurrence of a Corporate Transaction, Change in Control or Related

Ent ity Disposition.” Given this tripartite

definition, § 4, captioned “Corporate Transactions/Changes in Control/Related Entity

Dispositions,” is structured accord i ngly: It

provides a

separate subsection providing for

accelerated vesting on the occurrence of each

one of these three corporate events 

### SScorporate transaction (§ 4(a)), change in control (§

4(b)), and related entity disposition ( § 4(c)). 8 Despite this structure and the operative role

of corporate events, Sanchez’ s interpretation

requires one to read § 4(b) 

### SS the subsecti o n

dealing specifically with changes in corporate

control, itself in the middle of a section dealing

with corpo rate events generally 

### S S as fortuitously also including a general provision for

full vesting where an employ e e is terminated

without cause, rega rdless of any corporate

event generally, much less a corporate change

in control specifically. This is not a reasonable

interpretation of the Agreement.

Moreover, the application of § 2(a) renders

unreasonable Sanchez’s single-trigger theory.

Section 2(a) provides that the vesting schedule

set forth in the Notice 

### SS

25% per year, beginning one year after iss uance 

### S S is subject to

§ 4’s accelerated vesting provisions. But the

general vesting schedule set forth in the Notice

is not subject to § 4’s accelerated vesting

provisions as a ge neral matter; instead, it is

subject to § 4’s accelerated vesting provisions

“upon a corporate event.”

In other words, Sanche z’s options vest

pursuant to the Notice at the standard rate of

25% per year, beginn ing one year after issuance, unless the provisions of § 4 “relating to

the exercisability or termination of the Option

upon a corporate event” are applicable. San8 This point is not intended to take meaning

from the title heading of § 4, because the Agreement specifically provides, in Sec t ion 14, that

“[t]he captions used in the Notice and this Options

Agreement are inserted for convenien c e and shall

not be deemed a part of the Option for construction

or interpretation.” Instead, the point is intended to

demonstrate the general problem with Sanchez’s

(continued...) 8 (...continued)

single-trigger theory: It requires one to ignore the

str ucture of the Agreement by reading a general

termination without cause vesting provision into

the middle of a sub-section dealing with changes in

corporate control. Even further, Sanchez’s singletrigger theory r e

quires this reading notwithstanding

multiple other provisions treating § 4 as dealing

with corporate events.7

chez’s single-trigger theory, however, requires

precisely the oppo s ite: accelerated vesting

upon termination according to § 4 

### S S as opposed t o normal vesting pursuant to the Notice 

### SS without a corporate event. Here again,

Sanchez’s interpretation is not reasonable.

Section 4(d) provides further suppo rt f or

Verio’s position that the Agreement is unambiguousl y a double-trigger. That subsection,

which addresses tax implications rel ated to

accelerated vesting o f options, provides, in

part:

The po rt ion of the Option, if an Incentive

Stock Option, accelerated under th is Section 4 in connection wi th a Corporate

Event shall remain exercisable as an Incentive Stoc k Option under the Code only to

the extent the $100,000 dollar limitation of

S ection 422(d) of the Code is not exceeded.

(Emphasis added.) As with § 2(a), § 4(d)

characterizes acceleration under § 4 as occurring “in connec t ion with a Corporate Event”

and not, as Sanchez’s single-trigger theory

would have it, with termination without cause

in and of itself. 9

In light of these other provisions, Sanchez attem p ts a global effort to render illegitimate

any reference to other provisions of the Agreement when

deciding the threshold ambiguity

question. To this end, Sanchez repeatedly

asserts in her brief that reference to other

provisions of

t he Agreement proves a priori

that the Agreement is ambiguous. This is

incorrect as a matter of law.

Reference is not made to other provisions

of the Agreement because a concl usion has

been made (explicitly or implicit ly) that § 4(b)

is ambiguous; rather, such reference is made to

give meaning to the terms of § 4(b). “The

meaning of a contract is found by examination

of t he entire instrument and not by viewing

c lauses or phrases in isolation.” K uta

, 799

P.2d at 392.

In s um, when read in context of the entire

Agreement, § 4(b) unambiguously requi res

both termination without cause and termination within twelve months of a chan ge in

control before tri g gering accelerated vesting.

Thus, as a matter of law, Verio i s not obligate d t o vest, on an accelerated basis, Sanchez’s options solely on her termination without cause.

2.

The second interpretive question is whether

§ 4(b) provides for accelerated vesting where

an employee is terminated without cause

befo re a corporate change in control, or

whether it requires termination without cause

after a change in control. Sanchez’s alt ernative reading of the Agreement, which concedes

that § 4(b) is a double-trigger (requiring both

ter mination without cause and termination

within twelve months of a change in control),

claims that the contract is still ambiguous, and

thus the case was properly subm itted to the

jury, because it is uncertain wheth er the term 9 Sanchez attempts to refute any implication

from § 4(d) by contending that it was not intended

to address “all possible accelerated vesting situations.” Sanchez does not, however, explain why

this provision dealing with tax issues related to accele rated vesting would apply to all of § 4 by its

own terms, save her situation; nor, for that matter,

does Sanchez identify any other prov ision of the

Agreement that would address tax implications

associated with accelerated vesting in a termination

witho u t cause scenario not associated with a

corporate event.8

“within ” requires a change in control to

precede t he t ermination or whether it can

follow a termination. And given her termination fo ur months before a change in control

occurred, Sanchez maintains that there is a fact

question whether Verio breached its obligation

to accelerate the vesting of her options.

At many different levels, Sanchez’s doubletrigger interpretation of § 4(b) 

### S S termination

may occur either

in the twelve months before

or after a corporate change in contr ol 

### SS i s so

obviously a post-hoc invention of her lawyers

that it bears no relation to the rest of the

Agreement. Pursuant to the express terms of

the Agreement, if an employ e e is terminated

before a change in control, any unvested

options expire immediately upon termination.

Section 7 expressly provides that “to the

extent the Op t ionee was not entitled to

exercise the Option on the Termination Date

.

. . t he option shall terminate.” As a result,

when the second trig ger occurs 

### SS t he

corporate change in control 

### SS there are no

options remaining to accelerate.

The Notice merely pro vides that “the

Optionee acknowledges and agrees that the

shares subject to the Option shall vest, if at all,

only during the period of the Optionee’s

co nt inuous status as an employee.” The

Notice therefore expressly proscribes posttermination vesting of options. It follows that

a change in control occurring af ter an em

ployee is terminated 

### SS the secon d tri gger 

### SS cannot operate to vest options in an employee who has previously been terminated;

options mu st vest, “if at all,” only during the

“Op t ionee’s continuous status as an employee.”

Sanchez attem

pts to avoid this result by arg uing that the options of an employee terminated without cause do, in fact, vest at termination “even if at that time it was not y et

known whether the options would be accelerated.” Sanchez purports to find support for

this argument by quoting § 4(b) in her brief as

follows: “The Option shall become fully

vested and exercisable upon termination

. . .”

Fro m this Sanchez contends that § 4(b) provides for the immediate vesting and exercisability of a te rm

i nated employee’s options,

“subject to the contingency that a Change in

Control occurs within twelve months after the

termination.”

This self-styled “retroactive” or “contingent” vesting theory, which attem pts to avoid

the expiration mandated by the clear terms of

§ 7 and the Notice, is demonstrably incorrect.

Putting aside the absence of any provisions in

either the Agreement or the Notice that speak

to such retroacti ve o r contingent vesting, 1 0

§ 4(b) does not, as Sanchez claims, provide for

options to become fully vested and exercisable

o n t ermination; it provides (in the portion

repla c ed by Sanchez with an ellipsis) that

options become fully vested on termination if

the employee is terminated with in t welve

months of a change in control. It theref ore

follows as a matter of logic that (1) because

the opti o ns must vest, if at all, before

termination and (2) they vest on an accelerated

basis only on a change in control, then (3) the

10 In fact, Sanche z concedes in a footnote that

“[t]he Agreement does not spell out the logistics of

the purchase of shares subject to such an accelerated vesting contingency, but such logistics coul d

be handled any number of ways.” Indeed, such logistics could be handled any number of ways. The

trouble here, of course, is that the plain terms of

the Agreement indicate that the absence of such

logistics is not an over s ight, but, rather, is the

consequence of an Agreement that does not provide

for such retroactive vesting.9

change in control must occur before the

termination. Because Sanchez was terminated

more than

fo ur months before the change in

control, Verio is not, as a matter of law,

obligated to vest her options fully.

3.

Sanchez tries to demonst rate that the

Agreement is ambiguous by pointing to experts. She relies on the testimony of two law

profe sso rs familiar with stock option agreements and other forms of contingent equi ty

compensation: The first stated that “virtually

all” o f the other stock option agreements he

had reviewe d provided for full vesting upon

termination without cause; the second testified

to an “ industry custom” of providing for the

exercisability of stock options on termi n ation

without cause, opining that “in such circum

stances” a change in control “is not a condition

to the vesting of compensation.”

Sanchez may not, however, establish ambiguity by reference to such t est imony: “Ext rinsic evidence of intent is relevant only if,

after examination of the entire instrument, the

terms are ambiguous.” Union Rural Elec.

, 661

P.2d at 251. 11 “Absent such ambiguity, we

will not lo o k beyond the four corners of the

agreement to determine the meaning intended

by the pa rties.” A d Two

, 9 P.3d at 376–77. Because we have det ermined as a threshold

matter that the Agreement is unamb iguous,

Sanchez can no t establish ambiguity on the

basis of this extrinsic evidence.

V.

In sum, we do not doubt that Sanchez’ s

law yers presented a compelling story to the

jury: She was fired without cause before the

merger was executed so the c o mpany could

avoid payment of her stock options. Whatever

the me rit s of this story, it may not serve to

defeat cond it ions expressed in unambiguous

terms in the go verning instrument. Because

the Agreement plainly requires termination

without cause within the twelve-month period

after a corporate change in control, and the

undisputed circumstances of Sanchez’s termination do not satisfy these conditions, Verio is

entitled to judgment as a matter of law. 12 The

judgement is REVERSED, and judgment is

RENDERED in favor of Verio.

11 See also Ku ta , 799 P.2d at 382 (“Extrinsic

evidence is only admissible to prove intent where

the terms of a contract are ambiguous.”); Pepcol

, 687 P.2d at 1314 (“It is axiomatic that in t he absence of an ambiguity a written contract cannot be

varied by ex trinsic evidence.”); i d. (“It is only

where the terms of an agreement are ambiguous or

are used in some special or technical sense not

apparent from the contractual document itself that

the court may look beyond the four corners of the

agreement to determine the meaning intended by

the parties.”). 12 Because Verio is entitled to judgment as a

matter of law, we need not address its additional

arguments on appeal.