Discrimination on the basis of sexual orientation counts as discrimination on the basis of sex and therefore is already prohibited under relevant federal laws. That's the meat of the ruling released late yesterday by the U.S. Court of Appeals for the 7th Circuit, which covers Indiana, Illinois, and Wisconsin.
The 8-3 ruling has huge political and legal consequences. The court specifically determined that Title VII of the Civil Rights Act of 1964, which bars discrimination on the basis of sex, also bars discrimination on the basis of sexual orientation. So now, suddenly, without passing any new laws, we have a new protected class under federal law.
Mind you, the court doesn't see this as a new federal class, or at least the majority doesn't. The case revolved around a woman suing Ivy Tech Community College in Indiana claiming that she had been discriminated against and denied teaching positions on the basis of her sexual orientation. Sexual orientation is notably not covered under Title VII and lower courts had tossed her case out for that reason. But the full court determined that even though sexual orientation does not have special separate protection under federal law, it is nevertheless covered under bans on sex discrimination.
One of the arguments the court found compelling was that if you changed the plaintiff's sex to male and changed nothing else about her life, the discrimination would not have happened. She would be a man married to a woman—a heterosexual—and would not have been denied employment because of her relationship. Therefore, discrimination on the basis of her sex is indicated, not just her orientation. Furthermore, the Supreme Court has previously established a precedent that discrimination on the basis of whether a person conforms (or not) to a gender stereotype counts as sex discrimination. That precedent is also brought to bear in this case (and has been invoked in other cases of discrimination on the basis of sexual orientation and gender identity as well):
Viewed through the lens of the gender non-conformity line of cases, Hively represents the ultimate case of failure to conform to the female stereotype (at least as understood in a place such as modern America, which views heterosexuality as the norm and other forms of sexuality as exceptional): she is not heterosexual. Our panel describes the line between a gender nonconformity claim and one based on sexual orientation as gossamer-thin; we conclude that it does not exist at all. Hively's claim is no different from the claims brought by women who were rejected for jobs from traditionally male workplaces, such as fire departments, construction, and policing. The employers in those cases were policing the boundaries of what jobs or behaviors they found acceptable for a woman (or in some cases, for a man).
The majority ruling is fundamentally focused on the idea that court decisions over time have filled out the concept of what certain types of discrimination mean in real practice beyond just the basic terms of "sex" or "race" or any other protected characteristic. Discriminating against a woman because she's pregnant counts as sex discrimination. Discriminating against a person for being in an interracial marriage counts as discrimination on the basis of race. Therefore, their logic is that discriminating against a person for being a relationship with somebody of the same sex is discrimination on the basis of sex.
Such a ruling may also then bring into play a lively debate over the limits of who much leeway judges should have to determine the boundaries of a law and how much they should be bound to the original intent of the law's creators. That's a diplomatic way of saying that there's going to be a lot of discussion about "activist judges" in response to this case.
The three dissenting judges were very concerned at the consequences of the judiciary making the decision to massively expand the limits of what the classifications of the law covered:
The result is a statutory amendment courtesy of unelected judges. Judge Posner [who wrote a concurring opinion] admits this; he embraces and argues for this conception of judicial power. The majority does not, preferring instead to smuggle in the statutory amendment under cover of loosely related Supreme Court precedents. Either way, the result is the same: the circumvention of the legislative process by which the people govern themselves.
If this court decision ultimately withstands Supreme Court scrutiny (assuming it or a similar case makes it there—but I think that's a safe assumption), it would have the impact of rendering a huge amount of remaining gay political activism moot. The argument can also apply (and has been used in courts) to cover discrimination on the basis of gender identity, which would then have federal civil rights laws protecting transgender citizens as well.
There are multiple ways of both defending and critiquing this decision from a libertarian perspective. When elimination of laws and regulations are not on the table—and they're not here—the appropriate alternative is for them to all apply equally. That's been the libertarian argument for same-sex legal recognition. If the government is going to regulate marriages it shouldn't be discriminating on the basis of sex of the participants (and arguably the number of consenting adults who want to participate).
On the other hand, this is also a situation where the decision increases the opportunity for the government to use the law, its authority, and its monopoly of force in order to punish private citizens, and that should always be a reason for concern. Much of my resistance to the expanse of public accommodation laws and my defense for the right of religious shop owners to decline to provide their services to same-sex weddings is based not on some sort of perverse pleasure at seeing gay customers get rejected. Rather, I think the use of government power to punish people for their actions when it's absolutely unnecessary to do so presents a much greater threat for harm than such low-level and relatively uncommon discrimination.
Discrimination in employment and housing is a little different, though, and there are going to be those who feel it's fundamentally different to punish a baker for not making a wedding cake versus punishing a college refusing to employ a gay person. But if that's how the citizenry feel, maybe federal law should actually spell it out.