The Ninth Circuit on Friday delivered a significant victory for Eargo Inc., affirming the dismissal of a securities class action lawsuit that accused the hearing aid company of engaging in insurance billing fraud. The lawsuit, led by the IBEW Local 353 Pension Plan and Xiaobin Cai, claimed that Eargo, its executives, and underwriters misled investors by inflating the company’s revenue potential and failing to disclose critical risks about an insurance audit linked to a U.S. Department of Justice investigation.

A three-judge panel issued a memorandum supporting the district court’s dismissal, stating that Eargo’s initial public offering (IPO) prospectus was clear about the company’s evaluation of insurance coverage for potential customers. Contrary to the plaintiffs' claims, the panel explained that Eargo had been reimbursed by insurers for nearly three years before the statements in the prospectus were made, making the allegations of fraud by hindsight nonactionable.

The Ninth Circuit panel also rejected investors' arguments that Eargo had failed to disclose known risks related to forfeiting past insurance proceeds and the potential exclusion of "over-the-counter" hearing aids from insurance coverage. Eargo’s prospectus, according to the panel, adequately disclosed a range of risks including the possibility of reduced insurance coverage and legal risks associated with non-compliance with the False Claims Act.

The panel also upheld the dismissal of claims related to Eargo's post-IPO statements, including those concerning an audit by Blue Cross Blue Shield, revenue recognition, and the company’s growth. The court emphasized that Eargo’s statements about the audit were opinions and noted that investors did not provide sufficient evidence to prove that the statements were actionable.

Additionally, the panel pointed out that the lawsuit did not properly allege scienter (intent or knowledge of wrongdoing) since Eargo’s CEO and CFO had increased their stock holdings during the class period, which undermined the inference of fraudulent intent.

Eargo, which sells air conduction hearing aids directly to consumers, had marketed its products to customers under the Federal Employees Health Benefits Program (FEHBP) starting in 2017. The plaintiffs alleged that Eargo’s telecare business model was incompatible with FEHBP insurance policies, which require a diagnosis of "medical necessity" for hearing aids.

The case, Cai et al. v. Eargo Inc. et al., is case number 23-3470 in the U.S. Court of Appeals for the Ninth Circuit. The investors were represented by attorneys from Bernstein Litowitz Berge & Grossmann LLP and Block & Leviton LLP, while Eargo and the individual defendants were represented by Latham & Watkins LLP.