In Smith v. Bray, the key litigated issue was whether an employee could be held individually liable for unlawful retaliation under Section 1981 of the Civil Rights Act of 1866 when the employee caused an employer to unlawfully retaliate against another employee who complained of race discrimination.

The plaintiff, Smith, was an employee of Equistar Chemicals, LP, and he alleged that he was harassed by his supervisor because of his race, and was terminated in retaliation for reporting this harassment. Equistar Chemicals, LP was an affiliate of Lyondell Chemicals Company. After Smith was terminated, both entities declared bankruptcy and were discharged from liability to Smith. Smith sued his immediate supervisor and Equistar's human resource manager, Bray. Smith settled out-of-court with his immediate supervisor. However, he alleged that Bray:

Smith claimed that Bray should be held liable for race discrimination under Section 1981. Section 1981 prohibits discrimination and retaliation on the basis of race when making and enforcing contracts, and it applies to the employment relationship.

The US District Court for the Northern District of Illinois granted summary judgment in favor of Bray, because Smith did not present sufficient evidence that Bray:

Smith appealed to the US Court of Appeals for the Seventh Circuit.

On May 24, 2012, the Seventh Circuit affirmed summary judgment in favor of Bray because Smith did not present sufficient evidence that Bray sought to retaliate against Smith. However, the Seventh Circuit found, contrary to the district court, that Smith presented sufficient evidence that Bray participated in Smith's termination.

The Seventh Circuit addressed an issue of first impression: whether an employee who acts with a retaliatory motive may be individually liable under Section 1981 for causing his employer to retaliate against another employee. Based on the cat's paw theory of liability, the Seventh Circuit held that an individual employee with a retaliatory motive may be liable under Section 1981.

Under the cat's paw theory, an employer may be liable for discrimination when a biased supervisor or manager influences an employment decision, even if the biased supervisor or manager did not make the ultimate employment decision. Five federal circuit courts of appeal have also held that, under the cat's paw theory, a governmental employee who acts with discriminatory motivations may be held liable for discrimination under Section 1983 of the Civil Rights Act of 1871 (Section 1983), which prohibits discrimination by local governmental entities. The Seventh Circuit held that cat's paw liability extends to individual employees under Section 1981 because:

Contrary to the district court, the Seventh Circuit found that Smith presented enough evidence to create a genuine issue as to whether Bray took a materially adverse action against him. Bray actively participated in the decision to terminate Smith, including frequent discussions with the plant manager who terminated him.

Nonetheless, the Seventh Circuit affirmed summary judgment in favor of Bray. Smith did not present sufficient evidence to allow a reasonable jury to find that Bray retaliated against him for his complaints of race discrimination. Smith offered hearsay evidence of Bray's retaliatory motive, in the form of a conversation between Smith and his direct supervisor, during which the supervisor claimed that he and Bray would retaliate against Smith if he complained about the harassment. The Seventh Circuit held that the co-conspirator exception applied to this evidence, but Smith could not attribute the supervisor's motives to Bray. Smith did not show that Bray and Smith's supervisor shared the same unlawful motive, because an employer's human resources department necessarily collaborates with supervisors in determining which employees should be terminated.

Smith's other evidence was also not enough to show that his complaints were a "substantial or motivating factor" in Bray's decision to recommend his termination. For example, Bray's failure to return Smith's phone calls on several occasions was not evidence that she sought to retaliate against him.

Employers in the Seventh Circuit should be aware that employees with discriminatory motive can be held liable under Section 1981 when they intentionally cause their employer to take an unlawful action. However, the aggrieved employee must present evidence that the defendant employee participated in the unlawful decision because of a discriminatory motive.