A federal appeals court handed the Treasury Department - and by extension major banks - a stunning defeat in a case challenging the awarding of electronic benefits transfer contracts.
Reversing a September 1995 decision by a lower court, the U.S. Court of Appeals for the District of Columbia said the Treasury Department had illegally required that banks be the primary contractors for delivering welfare and food stamp payments through networks of electronic terminals.
The unanimous ruling by a three-judge panel, handed down Tuesday, went in favor of Transactive Corp., a transaction processing company that was shut out by the department's rules after winning benefits transfer contracts at the state level.
The Treasury Department is considering its appeal options, a spokesman said Wednesday. They might include requesting a hearing before the entire nine-member circuit court.
At least for the moment, the decision cast uncertainty over the eight- state contract that Transactive challenged in the test case. The Southern Alliance of States, the consortium which awarded that business to a group led by a Citicorp unit, might be forced to reopen the bidding to admit Transactive and other nonbanks.
C. Robin Britt Sr., secretary of the North Carolina Department of Human Resources and chairman of the Southern Alliance, said he was surprised by the outcome because he viewed the lower-court ruling as "very difficult to overturn" on appeal.
But he added, "It's clear that all the states are committed to follow through with EBT." The court decision was "one blip on the road to doing that."
John Pfeuffer, a vice president in Citibank's Chicago benefits transfer unit, said, "We're very disappointed. We're taking a look at our options."
He added that Citibank will "follow Treasury's lead on this. The ball's in their court."
Transactive, a subsidiary of the state-lottery processor Gtech Corp., sued the Treasury Department in March 1995 after the restrictive bidding procedure called IEI - invitation for expressions of interest - had been adopted by the Southern Alliance. The only way Transactive could have pursued that contract, which Citibank said could yield $400 million of revenue over seven years, would be as a bank's subcontractor.
The department won the earlier round in a district court in Washington, leading to the Transactive appeal decided this week.
The IEI process, designed to promote the spread of benefits transfer by streamlining conventional requests for proposal, was based on Treasury's rules for electronic funds transfer and direct deposit services that require the involvement of a bona fide "fiscal agent," or bank.
Austin, Tex.-based Transactive, which runs the EBT system for Texas' million-household food stamp program, said the IEI process "unlawfully and arbitrarily limited competition" - not to mention Transactive's freedom to play the lucrative role of primary contractor.
Writing for the appellate panel, Circuit Judge David B. Sentelle said the IEI rules were based on the Treasury Department's "mistaken belief that only a financial agent of the federal government could legally fulfill the specifications of its EBT design.
"We reverse the decision of the district court and direct it to remand this matter to Treasury for further proceedings not inconsistent with this decision."
Transactive spokesman Marc Palazzo said the company was vindicated by the judgment and warned, "If the states move forward (with the present contract) they will be in violation of federal procurement regulations."
"I'm very surprised that the court of appeals ruled in this way," said Thomas Greco, associate general counsel for the American Bankers Association in Washington. "It opens up a larger can of worms."
With contracts signed, funds already invested, and programs getting under way, "it does make it much more complicated," he said.
That said, a rolling back of IEI procedure may not be a significant blow to Citicorp, NationsBank Corp., and other banking companies that have shown interest in delivering benefits through automated teller machines and point of sale terminals.
While the Southern Alliance went the IEI route, subsequent biddings initiated by the Northeastern Coalition and the Western States EBT Alliance - both also chose Citibank - used traditional requests for proposal. But Transactive has challenged many such decisions as well.
"Citibank has been the successful bidder in the large majority of EBT contracts that didn't use the IEI process," said Mr. Greco. "Even if Transactive had been allowed to bid (on the Southern Alliance,) they would have lost."
