WASHINGTON - A federal judge handed the banking industry a decisive victory in its battle for control of electronic systems for delivering welfare and food stamp benefits.

U.S. District Judge Emmet G. Sullivan ruled against Transactive Corp., which had challenged a Treasury Department procedure for awarding electronic benefits transfer contracts exclusively to banks or other depository institutions.

Transactive, a subsidiary of Gtech Corp., the leading provider of automated state lottery systems, accused the Treasury of acting "arbitrarily and capriciously" in using a bidding process that discriminates against nonbanks.

The judge, who read his ruling Thursday in U.S. District Court for the District of Columbia, said Transactive failed to prove its claim.

Transactive, which is based in Austin, Tex., said it intends to appeal.

In the test case, Transactive sued to prevent an eight-state coalition, the Southern Alliance of States, from using the Treasury bidding procedure known as invitation for expressions of interest, or IEI. It was designed to streamline the conventional method of inviting requests for proposal, RFPs. The latter do not require that the primary contractor be a bank, thrift, or credit union.

Under the Southern Alliance IEI, released in March, a depository institution was to be designated on or after Oct. 17 to create a system that would give participating cardholders access through electronic terminals to Social Security and Veterans benefits, food stamps, and Aid to Families with Dependent Children.

The IEI rules call for a depository institution to serve as the government's financial agent. But the contractor could subcontract the data processing work to a nonbank.

States still have the option of issuing RFPs to nonbank providers. If the federal government is not a party to those deals, they do not need a bank agent.

Transactive, which provides electronic benefits transfer, or EBT, in Texas and New York City, "remains convinced that the procurement process restricts competition and is fundamentally unfair," said company spokesman Marc Palazzo. The decision Thursday "is not in the interest of the states, retailers, benefit recipients, or taxpayers."

Transactive's request for a stay on the Southern Alliance project, pending an appeal, was denied. Transactive had previously been denied an injunction, and the southern project was proceeding.

"We're thrilled," said Melba Price, associate director and policy coordinator for the Southern Alliance in St. Louis. "The IEI option must be available to the states" because it promotes scale economies and efficiencies, she said.

Edith S. Marshall, deputy chief of the civil division in the U.S. Attorney's office, said the ruling "was based on a sound reading of the legal principles and a proper application of the law."

"It is very significant for the banking industry and for the beneficiaries of EBT," said Thomas Greco, associate general counsel at the American Bankers Association. It solidifies banks' role in payment systems, he said, and "allows Treasury to use this efficient bidding process to modernize the delivery of federal benefits."

Deluxe Corp., a competitor of Transactive, is generally satisfied with the outcome, said Tom McLaughlin, vice president of government services for Deluxe Data in Milwaukee.

"Our concern was that the states have a choice," he said. "This ruling upholds a choice made by the southern states." Northeastern states, by contrast, chose to go the RFP route.

The judge said he had little leeway. Under Supreme Court precedent, a judge must defer to an agency's interpretation of its rules, and he said Transactive did not prove the applicability of certain exceptions.

Responding to Transactive's accusations, Treasury produced crates of records from agency deliberations. The judge said it "strains credulity" to think Treasury acted unreasonably on a policy that was so thoroughly documented.

The judge also dismissed a secondary challenge, saying Treasury rectified any technical violations of the Intergovernmental Cooperation Act during the course of the litigation.

Jeffrey Kutler in New York contributed to this article.

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