Ep Medsystems, Inc. v. Echocath, Inc.

235 F.3d 865 (2000)

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Nature of the Case

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Facts

D is a research and development company engaged in developing, manufacturing, and marketing medical devices to enhance and expand the use of ultrasound technology for medical applications and procedures. D makes ColorMark, which highlights metallic objects such as needles and other interventional instruments in color to permit them to be seen on existing ultrasound imaging screens. D also makes EchoMark, which electronically marks and displays the position of non-metallic objects such as catheters within the body. These products enable physicians to perform procedures such as needle biopsies, catheterizations, and intravascular imaging more safely and efficiently. D had its initial public offering on January 17, 1996, and issued a lengthy Prospectus. The Prospectus included the caution that 'an investment in the securities offered . . . is speculative in nature and involves a high degree of risk,' and set forth several pages of risk factors. D cautioned investors that the company 'intended to pursue licensing, joint development and other collaborative arrangements with other strategic partners . . . [but] there can be no assurance . . . that D will be able to successfully reach agreements with any strategic partners, or that other strategic partners will ever devote sufficient resources to the Company's technologies.' Six months after the public offering, P began consideration an investment. Frank DeBernardis, CEO of D, made a lengthy presentation during the August meeting to David Jenkins, P's President and CEO, James Caruso, P's CFO, and Anthony Varrichio, a Director. D represented it had engaged in lengthy negotiations to license its products and was on the verge of signing contracts with a number of prominent medical companies, including UroHealth, Johnson & Johnson, Medtronic, and C.R. Bard, Inc., to develop and market D's products. During the ensuing negotiations, D represented that the contracts with UroHealth, Johnson & Johnson, Medtronic, and C.R. Bard to develop these products were 'imminent.' D delivered a group of documents to P, which included the previously issued 1996 Prospectus and financial projections and marketing plan for fiscal years 1997 and 1998. D kept up the mantra of the deals are imminent all through negotiations. P entered into a subscription agreement to purchase 280,000 shares of preferred stock for $1,400,000. The agreement specified that D 'had not relied upon any representation or other information (oral or written) other than as contained in documents or answers to questions. D failed to enter into a single contract or to receive any income in connection with the marketing and development of the products. It also did not receive the expected payments from license fees. P sued alleging that P intentionally or recklessly made misrepresentations in connection with the sale of securities in an effort to induce D to purchase its securities, in violation of Section 10 of the Securities Exchange Act of 1934 and Rule 10b-5. D moved to dismiss the complaint under Rule 12(b)(6) and Rule 9(b). D presented the Prospectus to the Court and took the position that these documents established that any alleged misrepresentations were immaterial under the 'bespeaks caution' doctrine because they contained sufficient cautionary language. The court dismissed the complaint with prejudice. The court concluded that the representations were immaterial as a matter of law under the 'bespeaks caution' doctrine because of the cautionary language accompanying these alleged misrepresentations. The court held that P had failed to plead scienter with sufficient particularity as required by Rule 9(b) and loss causation. D appealed.