By Roger Parlof

(FORTUNE Magazine) – GENERAL MOTORS' "EMPLOYEE DIScount for everyone" promotion provided a welcome distraction in the form of stellar June sales. But one thing the sell-a-thon won't change is a possible war with the United Auto Workers. GM is seeking to pare health-care costs, and it's locked in a stare-down--the labor-management equivalent of the Cuban missile crisis. The stakes are massive: billions in potential savings for GM if it wins--which would mean an equivalent amount out of workers' pockets--or billions in losses if the union strikes in protest. (The last walkout, a 54-day local action in 1998, cost the automaker $2 billion.)

One reason for the tension: Nobody is certain what their ultimate rights are. Unlike pension benefits, which can't be terminated absent bankruptcy, the status of health benefits is negotiable and often ambiguous. So if push comes to shove, does GM have the power to modify those benefits unilaterally? The automaker keeps implying that it does--but it may well be bluffing.

GM's daunting problems are well known: its $1.1 billion first-quarter loss, the downgrading of its debt by two credit agencies, and its enormous obligations to retirees. (It paid $5.2 billion for health care last year, of which $3.6 billion went to retirees and their dependents.) While seeking concessions from the UAW, CEO Rick Wagoner has dropped veiled threats about taking unilateral action if he must.

But can he? Though both GM and the UAW declined to discuss their legal positions, surrogates have been less discreet. A GM spokesperson referred FORTUNE to a report by analyst Brian A. Johnson of Sanford Bernstein & Co. that maps out a nuclear option: GM, he writes, can unilaterally terminate retiree benefits without provoking a legal strike. Under a 1971 Supreme Court ruling, Johnson argues, health benefits are not a "mandatory" subject of bargaining, and therefore unions aren't usually allowed to strike over them. (If workers struck illegally, GM could replace them.)

Johnson contends that GM could cut off most retiree benefits, because under that same ruling, retirees are not "employees" covered by contracts negotiated after their retirement. Retirees could bring a class action to restore their benefits, and a court would then decide whether the parties had intended the benefits to "vest" for the retirees' lifetimes or, rather, if the company had reserved the right to terminate them. Johnson concludes that GM would likely win such litigation and notes that GM prevailed in a similar case against salaried (non-union) workers in 1998.

Johnson's views puzzle labor lawyer Leonard Page, who spent 30 years at the UAW and helped negotiate many of the agreements in question. "There's no possible interpretation of the GM-UAW contract which would permit mid-contract termination" of retiree benefits, he argues. Furthermore, Page insists that the health benefits of GM's retired hourly workers have vested. While it was common for the company to reserve the right to terminate benefits in salaried employees' health plans, Page says, comparable "clauses do not exist in any UAW-GM agreement.... We were not asleep at the switch."

GM and the UAW could negotiate modest savings in, say, prescription drugs, Page adds, as long as they don't cut the fundamental benefits. Beyond that, he says, the UAW doesn't even have the right to waive existing retirees' benefits, since the union doesn't represent them any more. And if GM disagrees? "What's that old phrase?" says Page. "Make my day." Truth is, the law is murky, and the only certainty is that all-out war would be devastating to all concerned. Both sides would be smart to blink before the shooting starts. -- Roger Parloff