Creation Supply, Inc. v. Selective Insurance Company of ( 2022 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 21-3172
CREATION SUPPLY, INC.,
Plaintiff-Appellant,
v.
SELECTIVE INSURANCE COMPANY OF THE SOUTHEAST,
Defendant-Appellee.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 14-cv-08856 — Charles P. Kocoras, Judge.
____________________
ARGUED SEPTEMBER 9, 2022 — DECIDED OCTOBER 19, 2022
____________________
Before ROVNER, HAMILTON, and SCUDDER, Circuit Judges.
SCUDDER, Circuit Judge. Creation Supply, Inc., and its in-
surer, Selective Insurance Company, come before us for the
second time in as many years to resolve yet another dispute
arising out of a decade’s worth of lawsuits. This protracted
litigation began in 2012 when Selective Insurance refused to
defend Creation Supply against an intellectual-property law-
suit. Since then the parties have battled it out across state and
federal court on virtually every ground possible: complaints
2 No. 21-3172
have been amended; causes of action have been dismissed
and reserved; motions have been filed and opposed; and
judgments have been awarded, appealed, affirmed, vacated,
and modified. It has been clear since 2015 that Selective Insur-
ance owed Creation Supply a duty to defend and that Selec-
tive breached that duty. Little more in this case is clear.
The multiple rounds of litigation have resulted in a pecu-
liar situation best described as damages splitting: Creation
Supply established Selective’s breach of its duty to defend
and won some damages in state court. It now seeks additional
damages in federal court under a different theory. Selective
Insurance objects, saying that the doctrines of claim and issue
preclusion bar Creation Supply’s federal lawsuit. The district
court agreed. But while that might have been the case under
ordinary circumstances, this case is far from ordinary. An Illi-
nois state court expressly reserved Creation Supply’s right to
file this claim in federal court, so Creation Supply’s suit is not
precluded by its earlier state-court litigation. In the end, we
reverse—but in doing so, we emphasize that this case is, and
hopefully will remain, an anomaly.
I
A
Creation Supply is a producer of markers (the kind you
write with). In 2012 one of its competitors sued it for trade-
mark violations. Creation Supply requested that Selective In-
surance provide coverage, but Selective refused, denying that
it owed a duty to defend. Creation Supply entered into a set-
tlement agreement with its competitor in late 2013, the terms
of which prevented Creation Supply from selling one of its
No. 21-3172 3
primary lines of markers. Following the settlement, Creation
Supply lost much of its business and struggled financially.
At no point did Selective Insurance ever provide coverage
for Creation Supply’s legal defense. Instead, it went on the
offensive and sought a declaration in Illinois state court that
it owed Creation Supply no duty to defend. Creation Supply
countersued, seeking its own declaration that Selective did
owe a duty to defend. Creation Supply also alleged (in a sep-
arate breach-of-contract count) that Selective’s failure to de-
fend amounted to a breach of the insurance policy.
After multiple summary judgment motions, the Illinois
circuit court entered partial summary judgment for Creation
Supply on its duty-to-defend claim. Along with the court’s
determination that Selective Insurance owed Creation Supply
a duty to defend came incidental relief pursuant to Illinois’s
declaratory-judgment statute. See 735 ILCS 5/2-701(c) (2016).
On appeal the Illinois appellate court established that the
statute limited incidental relief to fees Creation Supply had
incurred before the original trademark litigation settled. Also
left out of the incidental-relief award were any consequential
damages flowing from Selective Insurance’s refusal to defend
Creation Supply. The Illinois circuit court finalized the award
of incidental relief in October 2017.
Now rewind three years. In 2014—in the middle of the
state-court litigation on the duty-to-defend question—Crea-
tion Supply filed suit against Selective Insurance in federal
court. Creation Supply advanced both a claim for breach of
contract and a claim under section 155 of the Illinois Insur-
ance Code for vexatious and unreasonable conduct on Selec-
tive’s part.
4 No. 21-3172
Pause here and recognize the practical reality at this point
in time: Creation Supply, which had already obtained a judg-
ment that Selective Insurance had breached its duty to defend
under the insurance policy, sought to litigate some of the
damages flowing from this singular breach in state court and
others in federal court. In fact, Creation Supply was for a time
litigating the same damages in both state and federal court.
When it filed its breach-of-contract claim in federal court, Cre-
ation Supply’s breach-of-contract claim was still alive in state
court. Only two years later, in 2016, did Creation Supply re-
quest to voluntarily dismiss its state-court breach-of-contract
claim with leave to refile.
The Illinois circuit court granted the motion, dismissing
the claim and, importantly, expressly reserving Creation Sup-
ply’s right to maintain its federal action on its breach-of-
contract claim. For its part, Selective Insurance did not object
to either Creation Supply’s motion or the court’s express res-
ervation of the right to pursue the claim in federal court.
The state court litigation ended with the 2017 award of in-
cidental relief to Creation Supply. But litigation in federal
court marched on. In time the district court granted Creation
Supply’s motion for partial summary judgment on the ques-
tion of insurance coverage under the policy in question. The
district court then conducted a bench trial on the section 155
claim (alleging that Selective Insurance engaged in vexatious
and unreasonable conduct) and found for Creation Supply,
awarding nearly $3 million in damages on the section 155
claim alone. At that time, the district court did not reach the
question of damages under Creation Supply’s breach-of-
contract claim.
No. 21-3172 5
On appeal we reversed and remanded with instructions to
the district court to resolve the remaining issue of contract
damages. See Creation Supply, Inc. v. Selective Ins. Co. of the
Southeast, 995 F.3d 576, 578, 583 (7th Cir. 2021).
B
Instead of resolving this lone outstanding issue, however,
the parties raised new disputes, leading to this second appeal.
Following our remand, Creation Supply sought to amend its
complaint to seek punitive damages. The district court denied
the request, concluding that amendment would cause undue
delay and prejudice.
Selective Insurance then invoked Federal Rule of Civil
Procedure 12(c) and moved for judgment on the pleadings,
contending that the doctrines of claim and issue preclusion
barred Creation Supply’s remaining contract claim. The dis-
trict court agreed and entered judgment for Selective. First,
the court looked back at our 2021 opinion, which recognized
that the Illinois state courts had resolved the question of Se-
lective’s duty to defend and the incidental damages that fol-
lowed. The district court then observed that the Illinois courts
had entered “a final judgment as to both liability and dam-
ages” when deciding the duty-to-defend claim. And because
both the duty-to-defend claim and the breach-of-contract
claim arose out of the same set of operative facts—the insur-
ance policy issued by Selective and the original trademark lit-
igation—the district court concluded that Creation Supply’s
federal breach-of-contract claim was precluded. In reaching
this conclusion, the district court disregarded the state court’s
express reservation of Creation Supply’s right to refile its
breach-of-contract claim in federal court, reasoning that the
reservation had “fallen out of the case” because Creation
6 No. 21-3172
Supply (after receiving the reservation) continued to litigate
its duty-to-defend claim in state court.
Creation Supply now appeals, challenging both the dis-
trict court’s entry of judgment on the pleadings and its denial
of the company’s request to seek punitive damages.
II
Selective Insurance relies on the doctrines of claim and
issue preclusion to defend against Creation Supply’s federal
breach-of-contract claim. In assessing the district court’s rul-
ing, we conduct an independent review of these legal doc-
trines and how they apply in this case. See Valbruna Slater Steel
Corp. v. Joslyn Mfg. Co., 934 F.3d 553, 560 (7th Cir. 2019). And
because we are determining the preclusive effect of judg-
ments of Illinois state courts, we apply Illinois law. See id.(claim preclusion); Jensen v. Foley, 295 F.3d 745, 748 (7th Cir.
2002) (issue preclusion); see also 28 U.S.C. § 1738 (requiring
that subsequent courts afford full faith and credit to state-
court decisions).
A
We begin with Selective Insurance’s contention that the
doctrine of claim preclusion bars Creation Supply’s federal
suit. At a high level, the doctrine prevents a party from repeat-
edly litigating the same cause of action against the same party.
Three requirements must ordinarily be met for claim preclu-
sion to apply based on an Illinois state-court judgment: First,
a court with proper jurisdiction must have issued a final judg-
ment on the merits. Second, the claims in the two actions must
be the same. Third, the parties in the second action must be the
same as (or in privity with) those from the first. See Cooney v.
Rossiter, 986 N.E.2d 618, 621 (Ill. 2012).
No. 21-3172 7
But Illinois law also recognizes an exception—a circum-
stance where the doctrine of claim preclusion does not apply.
Illinois courts have adopted the approach recognized in the
Restatement (Second) of Judgments, which permits an action
that would otherwise be barred by claim preclusion if “[t]he
court in the first action expressly reserved the plaintiff’s right
to maintain the second action.” Green v. Nw. Cmty. Hosp., 928
N.E.2d 550, 554 (Ill. App. 2010) (quoting Restatement (Second)
of Judgments § 26(1)(b) (Am. L. Inst. 1982)). That is exactly
what the Illinois circuit court did here when it stated that
“[Creation Supply]’s rights are expressly reserved to maintain
its action against Selective in Federal Court regarding claims
of breach of contract and violation of Section 155 of the Illinois
Insurance Code.” Because the Illinois court expressly re-
served Creation Supply’s claims, it does not matter whether
the usual elements of claim preclusion are met. The doctrine
does not apply.
Selective Insurance points us to two Illinois Supreme
Court decisions that it says require us to ignore the express-
reservation exception when a plaintiff dismisses some claims
but continues to litigate others in the original action (a prac-
tice it calls “claim splitting”). In Rein v. David A. Noyes & Co.,
665 N.E.2d 1199 (Ill. 1996), the Illinois Supreme Court de-
clined to apply the express-reservation exception where some
initial claims were dismissed without prejudice, other claims
were litigated to final judgment, and the plaintiffs later sought
to revive their earlier claims that had been dismissed without
prejudice. See id. at 1202, 1207. The Illinois Supreme Court
charted much the same course in Hudson v. City of Chicago, 889
N.E.2d 210 (Ill. 2008), observing that “a plaintiff could not file
a complaint with multiple counts, take a voluntary dismissal
without prejudice of some of the counts, pursue the
8 No. 21-3172
undismissed counts to final judgment, and then harass the de-
fendant with successive suits simply because the dismissals
of those counts were entered ‘without prejudice.’” Id. at 216
n.2 (citing Rein, 665 N.E.2d at 1199).
But Selective Insurance overreads these cases. Under Se-
lective’s interpretation of Rein and Hudson, a plaintiff that ob-
tains an express reservation on one claim cannot continue to
pursue any remaining live claims—regardless of how little lit-
igation is left on those claims—because doing so would waive
the reservation. Illinois courts have not adopted such an ex-
pansive view of Rein and Hudson. Rather, Illinois courts un-
derstand those cases to stand for the more limited proposition
that a court must expressly reserve the plaintiff’s rights (rather
than merely dismissing without prejudice) for the express-
reservation exception to apply. See Quintas v. Asset Mgmt.
Grp., 917 N.E.2d 100, 106–07 (Ill. App. 2009); Green, 928 N.E.2d
at 554–55.
This makes good sense. Selective Insurance’s approach
would render the state court’s decision to reserve Creation
Supply’s right to maintain its action in federal court a hollow
act, signifying nothing. And it would reward Selective for its
bait-and-switch tactics of openly agreeing to the reservation
in state court and then—after the state-court claim was dis-
missed—objecting in federal court. We read neither Illinois
case law nor the Restatement as countenancing (let alone re-
quiring) this result, which would disregard the judgment of
the Illinois circuit court.
But while we do not second-guess that court’s decision to
expressly reserve Creation Supply’s breach-of-contract claim
for federal court, we observe that doing so has led to much of
this mess. As the district court aptly put it, “[t]here was only
No. 21-3172 9
one breach of contract here, even as there exist myriad ways
to breach the contract.” Creation Supply has not engaged in
claim splitting so much as damages splitting—seeking differ-
ent damages in different courts arising from the same exact
breach of an insurance contract. Why Creation Supply did not
resolve all its disputes in one forum—especially after receiv-
ing a favorable decision on the duty-to-defend question in
state court—is beyond us. Still, we must respect and accept
the Illinois circuit court’s express decision to reserve Creation
Supply’s breach-of-contract claim for federal court.
B
That takes us to Selective Insurance’s argument that, even
if Creation Supply’s federal breach-of-contract claim is not
barred by claim preclusion, it is nevertheless barred by the re-
lated doctrine of issue preclusion. In Illinois, “[i]ssue preclu-
sion prevents a party from relitigating an issue that it has pre-
viously litigated and lost.” Jensen, 295 F.3d at 748.
Selective Insurance’s position on this front is, at risk of un-
derstatement, foggy. As best we can tell, they contend that is-
sue preclusion prevents Creation Supply from bringing any
subsequent action in any forum based on Selective’s breach of
its duty to defend. That reasoning reflects a fundamental mis-
understanding of the doctrine and risks conflating claim pre-
clusion with issue preclusion. Issue preclusion does not cate-
gorically prevent multiple rounds of litigation in the way that
claim preclusion does. Rather, issue preclusion narrows the
scope of disputed issues in subsequent lawsuits, preventing
parties from relitigating issues that have already been de-
cided. See Nowak v. St. Rita High Sch., 757 N.E.2d 471, 478 (Ill.
2001) (“Application of the doctrine of collateral estoppel must
be narrowly tailored to fit the precise facts and issues that
10 No. 21-3172
were clearly determined in the prior judgment.”). In some cir-
cumstances, this means that issue preclusion can even be used
offensively by a party who prevailed in an earlier round of
litigation. See Herzog v. Lexington Township, 657 N.E.2d 926,
930 (Ill. 1995).
At times, however, Selective Insurance seems to make a
different point. They say that because the state courts have al-
ready resolved the issue of damages, Creation Supply cannot
try to relitigate this issue and get more damages in federal
court. This position is at least more consistent with the doc-
trine of issue preclusion.
But this contention runs into a different obstacle. Yes, an
“issue” for issue-preclusion purposes is broader than a
“claim”; an issue can be any question of fact or law so long as
it was material and controlling to the underlying judgment.
See Nowak, 757 N.E.2d at 477–78. An issue can include the cal-
culation of damages. See, e.g., Abramson v. Marderosian, 119
N.E.3d 1, 12 (Ill. App. 2018). But the issue must still be “iden-
tical” to that decided in the previous action. Nowak, 757 N.E.2d
at 478 (emphasis in original). And Selective Insurance’s asser-
tion that the Illinois state courts have already resolved the is-
sue of damages conflates incidental relief under Illinois’s
declaratory-judgment statute with damages that can be recov-
ered in a breach-of-contract suit.
The history of Creation Supply’s duty-to-defend claim in
state court makes this clear. Having twice reviewed the Illi-
nois court proceedings related to the calculation of the 2017
incidental-relief award, we see no consequential damages fac-
toring into that award—only litigation fees and the like. See
Creation Supply, 995 F.3d at 581 (contrasting “consequential
damages…that arose outside of the policy’s purview” with
No. 21-3172 11
“damages that arose under the policy”). This matters because
it may be possible for Creation Supply to recover consequen-
tial damages under a breach-of-contract theory that it could
not have recovered as incidental relief under Illinois law. And
that is not the only relief Creation Supply was unable to re-
cover under its duty-to-defend claim: the Illinois appellate
court specifically excluded certain fees from the scope of the
incidental-relief award. The damages calculation that the Illi-
nois courts performed is therefore narrower than the calcula-
tion would be in this federal case. Because the issues are not
identical, issue preclusion does not apply.
This conclusion also resolves Selective Insurance’s related
contention that our 2021 opinion established the law of the
case on the question of damages. Quite simply, we never re-
solved the question of contract damages in our prior opinion.
To the contrary, we held only that section 155 could not pro-
vide a remedy for Creation Supply. Because section 155 dam-
ages are different from contract damages, our 2021 opinion
does not prevent Creation Supply from seeking the latter.
Do not misunderstand or overread our conclusions. The
scope of remaining damages remains unresolved. At oral ar-
gument neither party could articulate specific consequential
damages to which Creation Supply might be entitled. It may
be that there are no damages left for Creation Supply to re-
cover in this standalone breach-of-contract suit. But that is not
for us to decide on appeal. We entrust the management of this
remaining issue to the district court’s sound discretion.
C
Before closing, we tie up one loose end—Creation Sup-
ply’s appeal of the district court’s denial of leave to amend.
12 No. 21-3172
We afford great deference to the district court’s decision here.
See Schor v. City of Chicago, 576 F.3d 775, 780 (7th Cir. 2009).
The district court considered several factors before denying
leave to amend: trial had been ongoing in federal court for
over seven years, discovery had closed and would potentially
have to be reopened, Selective Insurance had already relied
on Creation Supply’s complaint for its litigation strategy, and
the delay could slow the court’s docket and thus affect other
litigants. These considerations, the district court found, made
it likely that amendment would cause undue delay and prej-
udice. We see no abuse of discretion in the district court’s rea-
soning and therefore affirm the denial of leave to amend.
III
Although this litigation is sure to continue beyond this ap-
peal, the parties would do well to see this case to the finish
line sooner rather than later. By our measure, only one issue
remains to be resolved—damages under Creation Supply’s
breach-of-contract claim. We trust that the resolution of that
issue will come quickly and bring an end to this saga. For
now, though, we REVERSE the district court’s entry of judg-
ment on the pleadings, we AFFIRM the denial of leave to
amend, and we REMAND the case so the district court can
resolve the remaining issue of breach-of-contract damages.