## Facts

- EchoCath, a New Jersey medical-device company, developed ultrasound-based “women’s health products” (ColorMark and EchoMark).
- EchoCath conducted an IPO in January 1996 using offering materials containing extensive risk disclosures, including that the investment was speculative and that collaborations might not occur.
- During investment negotiations, EchoCath’s CEO allegedly made repeated oral statements that lengthy negotiations had already occurred with four prominent companies and that marketing contracts with those companies were “imminent,” and tied those statements to specific sales projections.
- MedSystems invested $1.4 million and executed a subscription agreement stating it relied only on information in the written offering materials.
- About fifteen months later, EchoCath allegedly had no contracts to market the women’s health products and no income from them, and warned MedSystems it would run out of operating funds without new investment.
- MedSystems alleged the CEO’s statements about negotiations and imminent contracts were false when made, were made knowingly or recklessly to induce the investment, and caused MedSystems’ investment to become worthless.

## Issues

1. Whether alleged oral statements about “lengthy negotiations” and “imminent” contracts were immaterial as a matter of law under the bespeaks-caution doctrine and general materiality principles given cautionary language in offering documents.
2. Whether the complaint adequately pleaded the elements of a § 10(b)/Rule 10b-5 claim, including material misstatement, scienter, reasonable reliance, and loss causation, to survive a Rule 12(b)(6) motion.
3. Whether dismissal with prejudice without leave to amend at the pleading stage was error.

## Decision

- The Third Circuit reversed the Rule 12(b)(6) dismissal and remanded.
- The court held the alleged “imminent contracts” and “lengthy negotiations already took place” statements could be treated as present or historical fact, not merely forward-looking projections, and therefore were not rendered immaterial as a matter of law by cautionary disclosures.
- The court held the complaint adequately alleged scienter based on the CEO’s role and alleged knowledge of negotiation status and the asserted intent to induce the investment.
- The court held reliance and loss causation were sufficiently pleaded and were generally fact questions not appropriate for categorical rejection at the pleading stage.
- The court held dismissal with prejudice and denial of leave to amend was improper at this early stage.

## Legal Principles

- The bespeaks-caution doctrine primarily protects forward-looking statements accompanied by meaningful, risk-specific cautionary language; it does not categorically bar claims alleging concrete misstatements of existing or historical fact.
- Generic risk disclosures in offering materials do not automatically negate materiality where the alleged fraud concerns specific representations about current negotiations and the existence or imminence of contracts.
- Scienter may be adequately pleaded by alleging that a senior officer, positioned to know the truth, knowingly or recklessly misrepresented negotiation status to induce an investment.
- Reasonable reliance and loss causation are commonly fact-bound and may be sufficiently pleaded despite contractual reliance disclaimers when the plaintiff alleges specific, repeated oral misrepresentations tied to the investment decision.
- Leave to amend should ordinarily be granted at the pleading stage absent a clear showing that amendment would be futile.

## Conclusion

The Third Circuit held that alleged misrepresentations about the existing status of negotiations and the imminence of specific contracts could be actionable despite extensive cautionary language, and that MedSystems’ allegations of scienter, reliance, and loss causation were sufficient to proceed beyond dismissal; the case was remanded and the with-prejudice dismissal was set aside.


EP MedSystems, Inc. v. EchoCath, Inc., 235 F.3d 865 (3d Cir. 2000)