Sanchez v. Verio Inc

United States Court of Appeals
Fifth Circuit
F I L E D
December 27, 2004
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 03-11341
_______________
RHONDA SANCHEZ,
Plaintiff-Appellee,
VERSUS
VERIO INC., ET AL.,
Defendant,
VERIO INC.,
Defendant-Appellant,
_________________________
Appeal from the United States District Court
for the Northern District of Texas
m 3:01-CV-972-N
_________________________

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Before JONES, SMITH, and STEWART,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:*
A jury returned a verdict in favor of
Rhonda Sanchez, finding that her former
employer, Verio Inc. (“Verio”), breached its
contractual obligation to vest her stock
options fully on her termination. Verio
appeals, contending that the stock-option
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 the jury. We
agree. Because the agreement unambiguously
does not require accelerated vesting in
Sanchez’s circumstances, we reverse and
render judgment in favor of Verio.
I.
Sanchez was employed by Verio, an inter-
net service provider, from February 1998 until
she was terminated in April 2000. At four
points during her employment, she received
stock options from Verio. Each time that
occurred, she was provided with and signed a
“Notice of Stock Option Award” (“Notice”)
that together with the “Stock Option Agree-
ment” (“Agreement”) sets forth the terms and
conditions governing the vesting, exercise, and
expiration of the options.
According to the general vesting schedule
in the Notice, Sanchez’s stock options vested
at a rate of twenty-five percent per year, be-
ginning one year after issuance, with each
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 ex-
ercisable 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 or
termination of the Option upon a corporate
event.
Section 4, captioned “Corporate Transac-
tions/Changes in Control/Related Entity
Dispositions,” enables, in its three subsections,
the accelerated vesting of stock options in cer-
tain enumerated (and here contested)
circumstances. The relevant part of § 4SSthe
provision at the center of this disputeSSis
§ 4(b), which states,
The Option shall become fully vested and
exercisable upon termination of the Con-
tinuous Status as an Employee, Director or
Consultant of the Optionee if such Contin-
uous Status as an Employee, Director or
Consultant is terminated by the Company
or a Related Entity without Cause or volun-
tarily by the Optionee with Good Reason
within twelve (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
of 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 5TH CIR. R. 47.5, the court has de-
termined that this opinion should not be published
and is not precedent except under the limited cir-
cumstances set forth in 5TH CIR. R. 47.5.4.

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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 after Sanchez was
terminated.
Having been terminated holding nearly
30,000 unvested options, Sanchez contacted
the company seeking to exercise all her op-
tions by invoking the accelerated vesting pro-
vision in § 4(b). Specifically, she claimed that
the company’s merger with NTT constituted a
“change in control” (as defined by the Agree-
ment) occurring within twelve months of her
termination without cause, thereby 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 alleging that
Verio had breached its contractual obligation
to provide for accelerated vesting. Verio
removed the case to federal court based on
diversity of citizenship. The parties filed
cross-motions for summary judgment in which
each contended that the Agreement unambigu-
ously 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 ver-
dict for Sanchez. Having found that Verio
“failed to comply” with the stock option
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
thus erred in submitting the case to the jury.
Beyond this threshold challenge, Verio also
questions the sufficiency of the evidence; the
use of a general verdict form, as opposed to
special interrogatories; and the refusal to
instruct the jury to interpret § 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 de
novo review. See, e.g., Stinnett v. Colo. Inter-
state Gas Co., 227 F.3d 247, 254 (5th Cir.
2000); Ad Two, Inc. v. City & County of Den-
ver, 9 P.3d 373, 376 (Colo. 2000). Pursuant
to a choice of law provision not contested by
either party, we apply Colorado law to deter-
mine whether the Agreement is ambiguous.3
“Written contracts that are complete and free
from ambiguity will be enforced according to
their plain language.” Ad Two, 9 P.3d at 376
(citing USI Props. E., Inc. v. Simpson, 938
P.2d 168, 173 (Colo. 1997)). If, however, we
determine that the 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.” Pepcol Mfg.
Co. v. Denver Union Corp., 687 P.2d 1310,
1314 (Colo. 1987) (quoting Union Rural Elec.
2 The court also awarded prejudgment interest
of $545,611.12.
3 Section 13 provides that the Agreement and
Notice “are to be construed in accordance with and
governed by the internal laws of the State of Colo-
rado 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.”

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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
without cause,4 accelerated vesting is triggered
only if the termination occurred in the twelve-
month period after a corporate change in
control. Because Sanchez was terminated
more than four months before the corporate
change in control was executed, Verio claims
it had no obligation to vest her options fully
upon her termination and that Verio is there-
fore entitled to judgment as a matter of law.
Sanchez disagrees. She offers two inter-
pretations of § 4(b), either of which she claims
supports the finding of ambiguity, and thus
supports the decision to submit this case to the
jury. Sanchez first contends that § 4(b) re-
quires accelerated vesting upon her termina-
tion without cause regardless of the occur-
rence of any corporate event. In other words,
contrary to Verio’s interpretation that § 4(b) is
a so-called “double-trigger” (i.e., accelerated
vesting only upon 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
modify the termination without cause provi-
sion; instead, the Agreement provides for
accelerated vesting “either if she was termi-
nated ‘without Cause,’ or she quit ‘with Good
Reason within twelve (12) months of a Change
in control.’” Under this interpretation,
Sanchez is entitled to accelerated vesting
based solely on the jury’s factual finding that
she was terminated without cause.
Alternatively, 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 nonetheless
ambiguous because it is uncertain whether the
term “within” requires 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’
indicates or requires that termination occur
specifically after a ‘Change in Control.’” And
because Sanchez was terminated only four
months before a change in control did in fact
occur, she contends that there is a fact ques-
tion whether her options should have vested
on an accelerated basis given that “her termi-
nation 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.” Kuta v. Joint Dist. No.
50(J), 799 P.2d 379, 392 (Colo. 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 with-
out cause.
5 See also Pepcol, 687 P.2d at 1314 (“An in-
tegrated contract in the first instance is to be in-
terpreted in its entirety with the end in view of
seeking to harmonize and give effect to all pro-
visions . . . .”); 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.”).

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examined and construed in harmony with the
plain and generally accepted meaning of the
words used, with reference to all of the agree-
ment’s provisions.” Fiberglass Fabricators,
Inc. v. Kylberg, 799 P.2d 371, 374 (Colo.
1990). “Of course, ‘the mere fact that parties
differ on their interpretations does not of itself
create an ambiguity.’” Dorman 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 ambig-
uous when they are susceptible to more than
one reasonable interpretation.” Ad Two, 9
P.3d 373 at 376 (emphasis added).
Despite this interpretive canon requiring in-
terpretation of a contract in its entirety, the
district court focused on § 4(b) in isolation.
Specifically, the court, in its written opinion
denying summary judgment, reasoned 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
second clause. It is possible the parties
intended for the ‘Change of Control’ to
apply to both clauses or just to the latter
clause, so the Agreement is susceptible to
more than one meaning, and it is ambigu-
ous.
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 modi-
fying both the 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 Colorado contract law, as well as the
common law of contracts 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 susceptible to more than one
reasonable interpretation.7 Read in light of
the entire Agreement, the provision is unam-
biguous: Before triggering accelerated vest-
ing, 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 without cause,
or whether it requires termination without
cause within twelve months of a change in
6 See, e.g., Dorman, 914 P.2d at 912 (stating
that courts should determine ambiguity by refer-
ence to plain language “with reference to all of the
agreement’s provisions”); see also AMERICAN JUR-
ISPRUDENCE, CONTRACTS § 331 (2d ed. 2004)
(“When deciding whether an agreement is ambigu-
ous, particular words should be considered, not as
if isolated from the context, but in the light of the
obligation as a whole . . . .”); id. (“To determine
contract ambiguity, a court looks to the entirety of
the contract.”); WILLISTON ON CONTRACTS § 30.5
(“In determining whether a contract is ambiguous,
the court begins with its plain language . . . 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 interpretation.”)
(emphasis added).

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control) the reasonableness of Sanchez’s
single-trigger interpretation is belied by vari-
ous other provisions in the Agreement. Sec-
tion 2(a), governing Sanchez’s “Right to Ex-
ercise,” expressly classifies § 4 as dealing with
corporate events:
Right to Exercise. The Option shall be ex-
ercisable 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 or
termination of the Option upon a corporate
event.
(Emphasis added.) Thus, § 2(a) indicates that
§ 4’s three accelerated vesting provisions are
operative on the occurrence of a “corporate
event.”
The Agreement defines “Corporate Event”
in § 3(d) to mean “the occurrence of a Corpo-
rate Transaction, Change in Control or Related
Entity Disposition.” Given this tripartite
definition, § 4, captioned “Corporate Transac-
tions/Changes in Control/Related Entity
Dispositions,” is structured accordingly: It
provides a separate subsection providing for
accelerated vesting on the occurrence of each
one of these three corporate eventsSScorp-
orate 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)SSthe subsection
dealing specifically with changes in corporate
control, itself in the middle of a section dealing
with corporate events generallySSas fortu-
itously also including a general provision for
full vesting where an employee is terminated
without cause, regardless 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 NoticeSS25% per year, begin-
ning one year after issuanceSSis 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 general matter; instead, it is
subject to § 4’s accelerated vesting provisions
“upon a corporate event.”
In other words, Sanchez’s options vest
pursuant to the Notice at the standard rate of
25% per year, beginning one year after issu-
ance, unless the provisions of § 4 “relating to
the exercisability or termination of the Option
upon a corporate event” are applicable. San-
8 This point is not intended to take meaning
from the title heading of § 4, because the Agree-
ment specifically provides, in Section 14, that
“[t]he captions used in the Notice and this Options
Agreement are inserted for convenience 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
structure 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 single-
trigger theory requires this reading notwithstanding
multiple other provisions treating § 4 as dealing
with corporate events.

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chez’s single-trigger theory, however, requires
precisely the opposite: accelerated vesting
upon termination according to § 4SSas op-
posed to normal vesting pursuant to the No-
ticeSSwithout a corporate event. Here again,
Sanchez’s interpretation is not reasonable.
Section 4(d) provides further support for
Verio’s position that the Agreement is unam-
biguously a double-trigger. That subsection,
which addresses tax implications related to
accelerated vesting of options, provides, in
part:
The portion of the Option, if an Incentive
Stock Option, accelerated under this Sec-
tion 4 in connection with a Corporate
Event shall remain exercisable as an Incen-
tive Stock Option under the Code only to
the extent the $100,000 dollar limitation of
Section 422(d) of the Code is not ex-
ceeded.
(Emphasis added.) As with § 2(a), § 4(d)
characterizes acceleration under § 4 as occur-
ring “in connection 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
attempts a global effort to render illegitimate
any reference to other provisions of the Agree-
ment when deciding the threshold ambiguity
question. To this end, Sanchez repeatedly
asserts in her brief that reference to other
provisions of the 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 conclusion has
been made (explicitly or implicitly) 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 the entire instrument and not by viewing
clauses or phrases in isolation.” Kuta, 799
P.2d at 392.
In sum, when read in context of the entire
Agreement, § 4(b) unambiguously requires
both termination without cause and termina-
tion within twelve months of a change in
control before triggering accelerated vesting.
Thus, as a matter of law, Verio is not obli-
gated to vest, on an accelerated basis, San-
chez’s options solely on her termination with-
out cause.
2.
The second interpretive question is whether
§ 4(b) provides for accelerated vesting where
an employee is terminated without cause
before a corporate change in control, or
whether it requires termination without cause
after a change in control. Sanchez’s alterna-
tive reading of the Agreement, which concedes
that § 4(b) is a double-trigger (requiring both
termination 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 submitted to the
jury, because it is uncertain whether 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 situa-
tions.” Sanchez does not, however, explain why
this provision dealing with tax issues related to ac-
celerated vesting would apply to all of § 4 by its
own terms, save her situation; nor, for that matter,
does Sanchez identify any other provision of the
Agreement that would address tax implications
associated with accelerated vesting in a termination
without cause scenario not associated with a
corporate event.

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“within” requires a change in control to
precede the termination or whether it can
follow a termination. And given her termina-
tion four 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 double-
trigger interpretation of § 4(b)SStermination
may occur either in the twelve months before
or after a corporate change in controlSSis 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 employee is terminated
before a change in control, any unvested
options expire immediately upon termination.
Section 7 expressly provides that “to the
extent the Optionee was not entitled to
exercise the Option on the Termination Date .
. . t he option shall terminate.” As a result,
when the second trigger occursSSthe
corporate change in controlSSthere are no
options remaining to accelerate.
The Notice merely provides 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
continuous status as an employee.” The
Notice therefore expressly proscribes post-
termination vesting of options. It follows that
a change in control occurring after an em-
ployee is terminatedSSthe second trig-
gerSScannot operate to vest options in an em-
ployee who has previously been terminated;
options must vest, “if at all,” only during the
“Optionee’s continuous status as an em-
ployee.”
Sanchez attempts to avoid this result by ar-
guing that the options of an employee termi-
nated without cause do, in fact, vest at termi-
nation “even if at that time it was not yet
known whether the options would be acceler-
ated.” 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 . . .”
From this Sanchez contends that § 4(b) pro-
vides for the immediate vesting and ex-
ercisability of a terminated employee’s options,
“subject to the contingency that a Change in
Control occurs within twelve months after the
termination.”
This self-styled “retroactive” or “contin-
gent” vesting theory, which attempts 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 retroactive or contingent vesting,10
§ 4(b) does not, as Sanchez claims, provide for
options to become fully vested and exercisable
on termination; it provides (in the portion
replaced by Sanchez with an ellipsis) that
options become fully vested on termination if
the employee is terminated within twelve
months of a change in control. It therefore
follows as a matter of logic that (1) because
the options 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, Sanchez concedes in a footnote that
“[t]he Agreement does not spell out the logistics of
the purchase of shares subject to such an acceler-
ated vesting contingency, but such logistics could
be handled any number of ways.” Indeed, such lo-
gistics 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 oversight, but, rather, is the
consequence of an Agreement that does not provide
for such retroactive vesting.

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change in control must occur before the
termination. Because Sanchez was terminated
more than four months before the change in
control, Verio is not, as a matter of law,
obligated to vest her options fully.
3.
Sanchez tries to demonstrate that the
Agreement is ambiguous by pointing to ex-
perts. She relies on the testimony of two law
professors familiar with stock option agree-
ments and other forms of contingent equity
compensation: The first stated that “virtually
all” of the other stock option agreements he
had reviewed provided for full vesting upon
termination without cause; the second testified
to an “industry custom” of providing for the
exercisability of stock options on termination
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 ambi-
guity by reference to such testimony: “Ex-
trinsic 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 look beyond the four corners of the
agreement to determine the meaning intended
by the parties.” Ad Two, 9 P.3d at 376–77.
Because we have determined as a threshold
matter that the Agreement is unambiguous,
Sanchez cannot establish ambiguity on the
basis of this extrinsic evidence.
V.
In sum, we do not doubt that Sanchez’s
lawyers presented a compelling story to the
jury: She was fired without cause before the
merger was executed so the company could
avoid payment of her stock options. Whatever
the merits of this story, it may not serve to
defeat conditions expressed in unambiguous
terms in the governing 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 termi-
nation 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 Kuta, 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 the ab-
sence of an ambiguity a written contract cannot be
varied by extrinsic evidence.”); id. (“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.

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