He was not discriminating. In fact, the very week that CAIR brought the lawsuit against him he had a person of the Islamis faith in one of his CHL classes. That proves he was not discriminating.
He was well within his rights to display that sign. It would have been different had his sign read "No X religion served here" but it did not. As that would have been against the Civil Rights Act of 1964.
Restaurants in the US have signs that read "we reserve the right to refuse service to anyone" this does not allow them to discriminate though. In most cases, they can refuse service when a customer's presence detracts from the safety, welfare and well-being of other customers and the restaurant.
/cheers