The 1901 novel on which the movie is based added the iconic "Smile when you say that" to American slang (the quote is actually "when you call me that, smile" from the book). The "that" is "son of a bitch". In the era in which the story occurs (~1875), one did not call someone else an SOB without expecting to be punched out. It was, however, acceptable for friends to call each other SOBs, in good humor. Hence, "Smile when you call me that."