The court wasn't having it and dismissed the employee's case. It held that Title VII doesn't enshrine a right to use slurs "within one's own protected group." Harassment is about the work environment it creates, not the speaker's identity.
As the court explained:
It is an absurdity to claim … that Title VII enshrines a right for any person to use any slur which applies to their own protected characteristic in the workplace. The results of such a rule would be impossible to apply. How is a manager to know whether the person who just used an anti-Semitic slur is Jewish, or who used a homophobic slur is homosexual? The questioning required to get to the bottom of those sorts of determinations would be sure to lead to more discrimination, not less.
The court continued:
Plaintiff's proposed rule would put employers in an unenviable position. Plaintiff would have it that employers are prohibited by the aforementioned statute from firing an employee for use of a slur against their own protected class, and therefore also powerless to cure the hostile work environment the employee's usage of such language may well create for another, more sensitive, member of that protected class. Plaintiff's theory essentially guarantees that an employer has no choice but to violate Title VII as to one employee or the other in such a situation."
The bottom line is that the identity of the speaker doesn't immunize the language. Your obligation under Title VII is to the workplace as a whole. Set clear expectations, enforce them even-handedly and without regard to protected class, and you'll be on solid ground to defend a termination such as this one.