I think it's not viable at this stage to put any money in the development of such a device. It would fit only a very narrow gap in the market indeed.
With a different generation of eInk-Display (colour, higher refresh-rate), well that could be possible.
Actually there
was an eInk reader the size of a palm with a flexible display in the making. But the company could not manage the project on its own and was sold so a taiwanese firm.
It was the Readius (still to be found in the wiki-pages here 
). Looked like a nice idea. Maybe it will resurface, who knows.
By the way: I do still read on my palm OS devices from time to time. But I hate autoscroll too.