Yeah, that's exactly how it reads to me - springboarding off their earlier discussion + plausible deniability = flirting! The other interpretation honestly never occurred to me 'til I started reading fic and it was all "poor Foggy, it's obvious Karen is only into Matt here" and I'm like, "what is this 'poor Foggy' business, she was totally flirting with him!" On the other hand, I seem to be in a definite minority position in the fandom (though prevailing sentiment in the comments here seems to be swinging the other way ...)