Ep Medsystems, Inc. v. Echocath, Inc.
| Decision Date | 19 October 1998 |
| Docket Number | No. Civ.A. 97-4926(AJL).,Civ.A. 97-4926(AJL). |
| Citation | 30 F.Supp.2d 726 |
| Parties | EP MEDSYSTEMS, INC., Plaintiff, v. ECHOCATH, INC., Defendant. |
| Court | U.S. District Court — District of New Jersey |
John J. Murphy, III, Stradley, Ronon, Stevens & Young, LLP, Cherry Hill, NJ, for Plaintiff.
Richard G. Primoff, Marc H. Supcoff, Rubin Baum Levin Constant & Friedman, New York City, for Defendant.
This is an action brought by the plaintiff, EP Medsystems, Inc. ("EPM"), against the defendant, EchoCath, Inc., ("EchoCath"). In its amended complaint (the "Amended Complaint"), EPM alleges EchoCath made material misrepresentations to induce EPM to purchase 280,000 shares of preferred stock of EchoCath (the "Securities"). In count I of the Amended Complaint, EPM seeks damages for violations of Section 10(b) of the Securities Exchange Act of 1934, as amended, 15 U.S.C. § 78j ("Section 10(b)"), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 ("Rule 10b-5"). See Amended Complaint at ¶¶ 28-35. In count II of the Amended Complaint, EPM seeks damages for common law fraud. See Amended Complaint at ¶¶ 36-40. Jurisdiction is asserted pursuant to 28 U.S.C. § 1331 and 28 U.S.C. § 1367.
Currently pending is a motion to dismiss (the "Motion to Dismiss") the Amended Complaint filed by EchoCath pursuant to Rules 9(b) ("Rule 9(b)") and 12(b)(6) ("Rule 12(b)(6)") of the Federal Rules of Civil Procedure and 28 U.S.C. § 1367 ("Section 1367").1 The documents relevant to the purchase of the Securities set out warning signals in plain language. These warning signals demonstrate that EPM cannot establish a reasonable investor would find the alleged misrepresentations and omissions material to the decision to invest in EchoCath. Accordingly, for the reasons set forth below, the Motion to Dismiss is granted.
On 7 October 1997, EPM commenced this action by filing a complaint (the "Complaint"). See Complaint. By letter, dated 13 November 1997, (the "13 November 1997 Letter") EchoCath advised EPM that it intended to move to dismiss the Complaint pursuant to Rule 9(b) and Rule 12(b)(6). See Exhibit A to DeBernardis Aff. at 1. EchoCath sent the 13 November 1997 Letter to put EPM on notice concerning deficiencies EchoCath found in the Complaint. This notification gave EPM an opportunity to amend the Complaint to correct the deficiencies and perhaps moot the Motion to Dismiss before it was filed.
On 26 November 1997, EchoCath filed an answer to the Complaint (the "Answer to the Complaint") and a counterclaim (the "Counterclaim") against EPM. See Answer to the Complaint. On 9 December 1997, EPM filed an answer to the Counterclaim (the "Answer to the Counterclaim"). See Answer to the Counterclaim.
On 3 December 1997, in response to the 13 November 1997 letter, EPM filed the Amended Complaint. See Amended Complaint. On 10 December 1997, EchoCath filed an answer to the Amended Complaint (the "Answer to the Amended Complaint") and a counterclaim against EPM. See Answer to the Amended Complaint. EchoCath thereafter filed the Motion to Dismiss.
EPM is involved in the development, marketing and sale of cardiac electrophysiology products used to diagnose, monitor and treat certain disorders. See Amended Complaint at ¶ 5.
In August 1996, the President and Chief Executive Officer of EPM, David Jenkins ("Jenkins"), together with the EPM Chief Financial Officer, James Caruso, ("Caruso") and Anthony Varricchio ("Varricchio"), a member of the EPM board of directors, traveled to the EchoCath plant to meet with the senior management of EchoCath (the "August 1996 Meeting"). See Amended Complaint at ¶ 9. The purpose of the August 1996 Meeting was to provide EPM management with a tour of the EchoCath facility and to give EPM management an opportunity to evaluate the technology under development by EchoCath. See id. From the August 1996 Meeting, EchoCath hoped EPM would be willing to invest in it.
While at the EchoCath plant, Jenkins, Caruso and Varricchio met with Frank DeBernardis ("DeBernardis"), the EchoCath President and Chief Executive Officer, and David Vilkomerson ("Vilkomerson"), the EchoCath Executive Vice President and Director of Research. See id. During the August 1996 Meeting, DeBernardis made a presentation in which he detailed the ongoing commitment of EchoCath to develop and market a line of health products for women. See id. at ¶ 10. According to DeBernardis, these products included a SSG catheter and a breast biopsy needle. See id. The Amended Complaint refers to these products generally as "women's health products." See id. at ¶¶ 10, 11, 12, 14, 16, 17, 19, 21. It appears the EchoCath sales projections specifically refer to the SSG catheter and the biopsy needle as "EchoMark" and "ColorMark," respectively. See id. at ¶ 14; see also Moving Brief at 16 n. 8.
In the course of the August 1996 Meeting, DeBernardis identified several contracts which EchoCath intended to enter into with third parties for the marketing and development of its health products for women. See Amended Complaint at ¶ 15. DeBernardis represented:
EchoCath had engaged in lengthy negotiations with and was on the verge of signing contracts with a number of companies including UroHealth [("UroHealth")], Johnson & Johnson [("J & J")], Medtronic [("Medtronic")] and C.R. Bard, Inc. [("Bard")] to develop and market these women's health products.
See id. at ¶ 10. It appears none of these contracts were consummated. See id. at ¶¶ 17-19.
EPM asserts the oral representations made by DeBernardis at the August 1996 meeting were "similar to" the written representations EchoCath had made in the 17 January 1996 prospectus (the "17 January 1996 Prospectus").3 See Amended Complaint at ¶ 11. The 17 January 1996 Prospectus, issued by EchoCath in connection with its initial public offering of stock, contained an abundance of warnings and cautionary language which bore directly on the risky, perhaps even speculative, nature of the investment EPM made in EchoCath. It contained, inter alia, the following statements:
[EchoCath] has developed a product (the "ColorMark Clip") utilizing the ColorMark technology ... [and] [EchoCath] has developed a catheter utilizing the EchoMark technology....
17 January 1996 Prospectus at 3.
[EchoCath] intends to use a portion of the proceeds of the Offering to market th[e] [catheter utilizing EchoMark technology].
Id. at 3-4; see Amended Complaint at ¶ 11.
Although [EchoCath] will allocate a portion of the proceeds of the Offering for the continued development of these products, the commercialization of any products incorporating these technologies, as well as any other proposed products utilizing [EchoCath's] technologies, will depend upon [EchoCath's] ability to obtain additional financing through joint ventures, licensing agreements or other collaborative arrangements or otherwise.
17 January 1996 Prospectus at 3-4.
[EchoCath] is a development stage company which has limited sales and which has incurred substantial losses since inception. An investment in the securities offered hereby is speculative in nature and involves a high degree of risk. Prior to making any investment decision, prospective investors should read and carefully review the `Risk Factors' section of this Prospectus.
Id. at 5 (emphasis added).
Among the factors cited by the auditors as raising substantial doubt as to [EchoCath's] ability to continue as a going concern is that [EchoCath] has incurred losses since inception and is expected to continue to incur losses and is in need of substantial funds. There can be no assurance that [EchoCath] will ever achieve significant revenues or profitable operations.
Id. at 7 (citing Report of Independent Certified Public Accountants) (emphasis added).
[EchoCath] believes that the net proceeds from the Offering, together with funds expected to be generated from operations, will be sufficient to meet its cash requirements for approximately 12 to 18 months following consummation of the Offering; however, there can be no assurance that [EchoCath] will not require additional financing prior to that time or that, if required, additional financing will be available on acceptable terms or at all. In any event, [EchoCath] will require substantial additional financing in the future to fully implement its proposed business plan.
Id. at 7 (emphasis added); see id. at 23 (repeating representations).
[EchoCath] has no binding commitments from any third parties to provide funds to [EchoCath] and there can be no assurance that additional financing will be available on terms favorable or acceptable to [EchoCath], if at all. Failure to obtain such additional financing would have a material adverse effect on [EchoCath's] business and prospects and could require [EchoCath] to seriously limit or cease its operations.... Former sources of capital are not obligated and are not expected to contribute, loan or provide any additional financing to [EchoCath].
Id. at 7 (emphasis added); see id. at 23 (repeating representations).
The commercial success of [EchoCath's] ColorMark Clip [and] the EchoMark EP Catheter, ... as well as [EchoCath's] other products and proposed products, will depend upon acceptance of such products by the medical community as safe, useful, and cost-effective.... The future success of [EchoCath] will depend, in part, on the degree of clinical acceptance of ultrasound imaging as opposed to competing technologies as well as on acceptance of [EchoCath's] products for ultrasound imaging applications.
[EchoCath] intends to pursue licensing, joint development and other collaborative arrangements with other strategic partners. There can be no assurance, however, that [EchoCath] will be able to successfully reach agreements with any...
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