The case is NRA v. City of Chicago, the challenge to the Chicago handgun ban. The core argument:
Cruikshank, Presser, and Miller [v. Texas] [late 1800s Supreme Court precedents -EV] rejected arguments [for applying the Second Amendment to the states -EV] that depended on the privileges and immunities clause of the fourteenth amendment. The Slaughter-House Cases, 83 U.S. (16 Wall.) 36 (1873), holds that the privileges and immunities clause does not apply the Bill of Rights, en bloc, to the states.... [P]laintiffs contend that we may use the Court’s “selective incorporation” approach to the second amendment. Cruikshank, Presser, and Miller did not consider that possibility, which had yet to be devised when those decisions were rendered. Plaintiffs ask us to follow Nordyke v. King, 563 F.3d 439 (9th Cir. 2009), which concluded that Cruikshank, Presser, and Miller may be bypassed as fossils.... Another court of appeals has concluded that Cruikshank, Presser, and Miller still control even though their reasoning is obsolete. Maloney v. Cuomo, 554 F.3d 56 (2d Cir. 2009) [that's the nunchaku case in which Judge Sotomayor was on the panel -EV]. We agree with Maloney ....
Repeatedly, in decisions that no one thinks fossilized, the Justices have directed trial and appellate judges to implement the Supreme Court’s holdings even if the reasoning in later opinions has undermined their rationale. “If a precedent of this Court has direct application in a case, yet appears to rest on reasons rejected in some other line of decisions, the Court of Appeals should follow the case which directly controls, leaving to this Court the prerogative of overruling its own decisions.” Cruikshank, Presser, and Miller have “direct application in [this] case”. Plaintiffs say that a decision of the Supreme Court has “direct application” only if the opinion expressly considers the line of argument that has been offered to support a different approach. Yet few opinions address the ground that later opinions deem sufficient to reach a different result. If a court of appeals could disregard a decision of the Supreme Court by identifying, and accepting, one or another contention not expressly addressed by the Justices, the Court’s decisions could be circumvented with ease. They would bind only judges too dim-witted to come up with a novel argument.
Anyone who doubts that Cruikshank, Presser, and Miller have “direct application in [this] case” need only read footnote 23 in Heller. It says that Presser and Miller “reaffirmed [Cruikshank’s holding] that the Second Amendment applies only to the Federal Government.” The Court did not say that Cruikshank, Presser, and Miller rejected a particular argument for applying the second amendment to the states. It said that they hold “that the Second Amendment applies only to the Federal Government.” The Court added that “Cruikshank’s continuing validity on incorporation” is “a question not presented by this case.” That does not license the inferior courts to go their own ways; it just notes that Cruikshank is open to reexamination by the Justices themselves when the time comes. If a court of appeals may strike off on its own, this not only undermines the uniformity of national law but also may compel the Justices to grant certiorari before they think the question ripe for decision. State Oil Co. v. Khan, 522 U.S. 3 (1997), illustrates the proper relation between the Supreme Court and a court of appeals. After Albrecht v. Herald Co., 390 U.S. 145 (1968), held that antitrust laws condemn all vertical maximum price fixing, other decisions (such as Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977)) demolished Albrecht’s intellectual underpinning. Meanwhile new economic analysis showed that requiring dealers to charge no more than a prescribed maximum price could benefit consumers, a possibility that Albrecht had not considered. Thus by the time Khan arrived on appeal, Albrecht’s rationale had been repudiated by the Justices, and new arguments that the Albrecht opinion did not mention strongly supported an outcome other than the one that Albrecht announced. Nonetheless, we concluded that only the Justices could inter Albrecht. See Khan v. State Oil Co., 93 F.3d 1358 (7th Cir. 1996). By plaintiffs’ lights, we should have treated Albrecht as defunct and reached what we deemed a better decision. Instead we pointed out Albrecht’s shortcomings while enforcing its holding. The Justices, who overruled Albrecht in a unanimous opinion, said that we had done exactly the right thing, “for it is this Court’s prerogative alone to overrule one of its precedents.”
I don't think this reasoning (from Judge Frank Easterbrook, joined by Judge Richard Posner and Judge William Bauer) does justice to the plaintiffs' arguments. "Selective incorporation" isn't just a different "line of argument" for incorporation -- it is an argument under a different constitutional clause, the Due Process Clause of the Fourteenth Amendment (something the opinion doesn't mention). The late 1800s cases rejected direct application of the Second Amendment to the states, and incorporation via the Privileges and Immunities Clause of the Fourteenth Amendment. They didn't discuss in any detail whether state restrictions on the right to bear arms were potentially unconstitutional under the Second Amendment as incorporated via the Due Process Clause -- the very clause through which most of the Bill of Rights was later incorporated.
And I know of no precedents holding that lower courts must reject arguments against a statute under one constitutional clause just because similar statutes have been upheld against challenges under a different constitutional clause. Such arguments under different constitutional clauses don't call on the lower court "to overrule one of [the Court's] precedents," because the precedent deals only with an earlier clause. For instance, when the Court held that the mandatory federal Sentencing Guidelines generally violate the Jury Trial Clause, it wasn't overruling its past precedents that upheld the Guidelines against separation of powers challenge; it was considering a different constitutional challenge.
Likewise, when the Court held that closing a criminal trial, even with the defendant's permission, presumptively violated the First Amendment, it wasn't overruling the then-one-year-old precedent that upheld such a closure against a Public Trial Clause challenge. And when the Court held that preferences in city-funded construction contracts for city residents violated the Privileges and Immunities Clause of Article IV, it wasn't overruling the then-one-year-old precedent that upheld such preferences under a Commerce Clause challenge. And lower courts would similarly not have been barred from adopting such arguments, because they wouldn't have been trying to "overrule" a past precedent. See, e.g., Waters v. Churchill, 511 U.S. 661, 678 (1994) (plurality opinion) ("[C]ases cannot be read as foreclosing an argument that they never dealt with.") (citing United States v. L.A. Tucker Truck Lines, Inc., 344 U.S. 33, 38 (1952)); see also Miller v. California Pac. Med. Ctr., 991 F.2d 536, 541 (9th Cir. 1993) ("It is a venerable principle that a court isn't bound by a prior decision that failed to consider an argument or issue the later court finds persuasive.").
Moreover, the Court itself made clear, in roughly the era in which the cited cases were decided, that the two amendments might have separate coverage: "[Defendants] appeal to another clause of the 14th Amendment, and insist that the self-incrimination which they allege the instruction to the jury compelled was a denial of due process of law. This contention requires separate consideration, for it is possible that some of the personal rights safeguarded by the first eight Amendments against national action may also be safeguarded against state action, because a denial of them would be a denial of due process of law." Twining v. New Jersey, 211 U.S. 78, 99 (1908) (since reversed as to the substantive question whether the privilege against self-incrimination should indeed be applicable to the states via the Due Process Clause).
Nor does the quotation from footnote 23 of Heller fully dispose of the plaintiffs' arguments. That "Presser v. Illinois, 116 U. S. 252, 265 (1886) and Miller v. Texas, 153 U. S. 535, 538 (1894), reaffirmed that the Second Amendment applies only to the Federal Government" doesn't speak to whether the Due Process Clause applies the right to bear arms to state laws, under
This having been said, figuring out the exact scope of the Court's precedents on this matter isn't easy. Heller did start the quoted footnote with the phrase, "With respect to Cruikshank’s continuing validity on incorporation, a question not presented by this case, we note that Cruikshank also said that the First Amendment did not apply against the States and did not engage in the sort of Fourteenth Amendment inquiry required by our later cases." This could reasonably be read as saying that Cruikshank was indeed dispositive of the incorporation question (though that it might no longer be valid, which is to say might merit overruling). It also treats the Fourteenth Amendment as a unitary basis for incorporation, rather than treating the two clauses separately. Other Court decisions have likewise spoken in broad terms, see, e.g., Knapp v. Schweitzer, 357 U.S. 371, 378 n.5 (1958) ("By 1900 the applicability of the Bill of Rights to the States had been rejected in cases involving claims based on virtually every provision in the first eight Articles of Amendment," citing among other things Cruikshank as to the "right to keep and bear arms"), overruled as to the substantive question of incorporation of the privilege against incrimination, Murphy v. Waterfront Comm'n, 378 U.S. 52 (1964). (Presser also said in passing that, "The argument of the plaintiff in error that the legislation mentioned deprives him of either life, liberty, or property without due process of law, or that it is a bill of attainder or ex post facto law, is so clearly untenable as to require no discussion," but not having the briefs in front of me it's hard to tell whether this was a rejection of the incorporation-via-due-process argument or of a separate procedural claim.)
So it's not implausible, I think, to treat the Court's precedents as stare decisis on the question of incorporation via the Fourteenth Amendment generally, rather than solely of incorporation via the Privileges or Immunities Clause (though I'd probably be inclined to the other position). But it seems to me that the case is not nearly as clear as the Seventh Circuit's analysis suggests, and that the opinion's not discussing the difference between the two Clauses of the Fourteenth Amendment is a significant weakness.