Havoco of America, Ltd. ("Havoco") filed an attorney malpractice suit against the law firm of Freeman, Atkins & Coleman, Ltd. and several of its attorneys (collectively, "Freeman"). Havoco alleged that Freeman's failure to file a timely claim prevented Havoco from recovering from a defendant in the underlying litigation under tort, conspiracy, and breach of fiduciary duty theories. The district court granted summary judgment for Freeman. It reasoned that the jury's verdict on a contractual claim in the underlying litigation collaterally estopped Havoco from arguing that, absent Freeman's negligence in failing to file the complaint, it would have recovered under its other theories. For the reasons that follow, we reverse and remand for further proceedings.

* BACKGROUND

The underlying litigation has been to this court on several occasions.1 We assume familiarity with our earlier decisions, and set forth here only the factual background and procedural history directly relevant to our analysis of the attorney malpractice issue before us in this appeal.

In January 1981, the Freeman law firm filed suit on behalf of Havoco against Elmer Hill and his company, Hilco, Inc. Havoco alleged that the defendants had deprived it of the benefits of a multimillion dollar contract to supply coal to the Tennessee Valley Authority ("TVA"). In November 1981, after obtaining leave to amend, Freeman added Sumitomo Shoji America, Inc. ("Sumitomo") as a defendant. Havoco's amended complaint raised several claims against Sumitomo: conspiracy to defraud, tortious interference with contractual relations, fraud and deceit, breach of fiduciary duty, and breach of contract. With the exception of the breach of contract claim, each of these causes of action was subject to a five-year statute of limitations. By the time Freeman had filed Havoco's amended complaint, the five-year limitations period had expired.

In early 1989, Sumitomo moved for summary judgment on the ground that Havoco's tort and breach of fiduciary duty claims were time-barred. Havoco, which had retained new counsel, resisted the motion. On October 30, 1990, the district court ruled in Sumitomo's favor. Havoco of Am., Ltd. v. Hilco, Inc., 750 F. Supp. 946 (N.D.Ill.1990). It dismissed as time-barred all of Havoco's claims against Sumitomo, except the breach of contract claim. Havoco then amended its complaint. It proceeded to trial against Hill on tort, conspiracy, and breach of fiduciary duty theories. However, it proceeded against Sumitomo only on a breach of contract claim. This breach of contract claim alleged solely that Sumitomo had "failed to provide an irrevocable, transferable, revolving letter of credit to Havoco, as was provided for in paragraph 6 of the Sales Agency contract." R.51, Ex. I, p 41. Havoco contended that Sumitomo had breached the contract by posting monthly, non-revolving letters of credit. Sumitomo did not contest this issue. However, it argued that Havoco had waived its breach of contract claim by repeatedly accepting Sumitomo's non-revolving letters of credit.2

At the close of evidence, the district court instructed the jury on Havoco's theories of recovery and on Sumitomo's defense.3 The jury was given two special interrogatories that related to Havoco's claim against Sumitomo. In response to the inquiry:

Did Havoco waive its breach of contract claim against Sumitomo by acquiescing in Sumitomo's performance of its agreement with Havoco?

the jury marked "yes." R.51, Ex. E. In response to the query:

If you find that Havoco suffered any damage, was it caused by Sumitomo failing to provide a revolving letter of credit?

the jury marked "no." Id. The jury awarded Havoco $15,000,000 on the counts against Hill. However, it found Sumitomo not liable on the breach of contract claim. Both Hill and Havoco appealed from portions of the decision that were adverse to them. We affirmed. 971 F.2d 1332 (7th Cir.1992). Hill subsequently declared bankruptcy. Havoco has been unable to collect any damages from him.

On February 3, 1993, Havoco brought an attorney malpractice suit against Freeman. The lawsuit alleged that Freeman committed malpractice by failing to name timely Sumitomo as a defendant to Havoco's tort action.4 Freeman moved for summary judgment. It submitted that, in the underlying litigation, the jury specifically found in resolving the contract action that Havoco was not damaged by Sumitomo's failure to provide the revolving letter of credit. Freeman contended that this finding estopped Havoco from arguing that the same conduct damaged Havoco in tort. The district court granted Freeman's motion.5 It first noted that each of the claims that had been dismissed in the underlying litigation would have required Havoco to demonstrate that Sumitomo caused Havoco to suffer damages. The court then noted that the jury in the underlying litigation found that Sumitomo had not damaged Havoco. The district court reasoned that the "same alleged activities by Sumitomo" had served as the basis for Havoco's contract and tort claims. R.71 at 11. Accordingly, it concluded, the jury's verdict collaterally estopped Havoco from claiming that it would have recovered damages from Sumitomo had its tort claims been presented to the jury.

Havoco filed a motion to reconsider. It submitted that Freeman's alleged malpractice had precluded Havoco from alleging that Sumitomo and Hill were coconspirators. Havoco claimed that, if it had been able to establish a conspiracy that included Sumitomo, it could have recovered the damages awarded against Hill from Sumitomo. The district court denied Havoco's motion. It reasoned that "[u]nder Illinois law, the basis of a civil conspiracy claim is the wrongful act alleged to have been done in furtherance of the conspiracy, not the conspiracy itself." R.77. The court then stated that the jury verdict in the underlying suit established that Sumitomo had not committed the alleged wrongful acts. Therefore, the court concluded, a jury could not have found Sumitomo to have been involved in any conspiracy.

We review the district court's grant of summary judgment de novo. All reasonable inferences must be drawn in favor of the nonmoving party. Hedberg v. Indiana Bell Tel. Co., 47 F.3d 928, 931 (7th Cir.1995). We shall affirm the district court if there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Id.; Boggs v. Adams, 45 F.3d 1056, 1059 (7th Cir.1995). Here, Freeman seeks summary judgment by invoking the affirmative defense of collateral estoppel. Freeman therefore has the burden of establishing that, on this record, the application of collateral estoppel requires that it prevail in this malpractice action as a matter of law. See Freeman United Coal Mining Co. v. Office of Workers' Compensation Program, 20 F.3d 289, 294 (7th Cir.1994) (noting that collateral estoppel is an affirmative defense and that the party asserting it has the burden of establishing its applicability).

The parties agree that Illinois law governs the substantive issues in this diversity suit. Under Illinois law, a plaintiff alleging legal malpractice must prove "that the defendant attorney owed [the] plaintiff a duty of due care arising from the attorney-client relationship, that the defendant breached that duty, and that as a proximate result, the plaintiff suffered injury." Sexton v. Smith, 112 Ill. 2d 187, 97 Ill. Dec. 411, 413-14, 492 N.E.2d 1284, 1286-87 (1986); Nika v. Danz, 199 Ill.App.3d 296, 145 Ill. Dec. 255, 264, 556 N.E.2d 873, 882 (1990). When a plaintiff alleges that an attorney was negligent in failing to file a timely cause of action, he must "recreate and litigate the action which was never filed" to establish what the result "should have been." Danz, 145 Ill. Dec. at 264, 556 N.E.2d at 882.

As this case comes to us, the only issue before us is whether Freeman's alleged malpractice caused Havoco any injury. The district court was of the view that Freeman's failure to file timely various claims against Sumitomo could not have injured Havoco because the jury verdict on the contract count in the underlying litigation established that Sumitomo had not damaged Havoco. Havoco submits, however, that the district court should not have permitted Freeman to rely on collateral estoppel in this context. In Havoco's view, the breach of contract claim which it presented to the jury in the underlying litigation was limited to Sumitomo's failure to provide a revolving letter of credit. Havoco therefore contends that its other claims against Sumitomo, which were held to be barred by the statute of limitations because of Freeman's alleged negligence, involved other conduct. Thus, Havoco argues, these claims were not coextensive with the breach of contract claim that it presented to the jury. Havoco submits that, were it not for Freeman's negligence, it could have established that Sumitomo and Hill were coconspirators. Freeman responds that the district court's instructions in the underlying litigation invited the jury to consider "whether Sumitomo breached any contract obligation," R.65, Ex. D, not simply whether Sumitomo breached the revolving letter of credit provision. In Freeman's view, Sumitomo would have breached its contractual duty to act as Havoco's exclusive agent, as well as its contractual duty of good faith and fair dealing, had it engaged in any of the conduct that formed the basis of Havoco's tort, conspiracy, or breach of fiduciary duty claims. Thus, Freeman concludes, the jury's finding of no liability on the breach of contract claim forecloses any argument that Havoco could have recovered against Sumitomo under these additional theories.

In order to determine whether the jury's verdict in the underlying litigation precludes Havoco's present claim against Freeman, we must decide whether, under the circumstances presented here, Freeman can assert the affirmative defense of collateral estoppel. We apply, as do the majority of the circuits,6 federal principles of preclusion.7

Collateral estoppel refers to a judgment's effect of " 'foreclosing relitigation in a subsequent action of an issue of law or fact that has been actually litigated and decided in the initial action.' " Freeman United Coal Mining Co., 20 F.3d at 293 (quoting La Preferida v. Cerveceria Modelo, S.A. de C.V., 914 F.2d 900, 905 n. 7 (7th Cir.1990)); see also Montana v. United States, 440 U.S. 147, 153, 99 S. Ct. 970, 973, 59 L. Ed. 2d 210 (1979) ("Under collateral estoppel, once an issue is actually and necessarily determined by a court of competent jurisdiction, that determination is conclusive in subsequent suits based on a different cause of action involving a party to the prior litigation."). Collateral estoppel will apply if: (1) the issue sought to be precluded is the same as that involved in the prior action; (2) the issue was actually litigated; (3) the determination of the issue was essential to the final judgment; and (4) the party against whom estoppel is invoked was fully represented in the prior action. Meyer v. Rigdon, 36 F.3d 1375, 1379 (7th Cir.1994); Freeman United Coal Mining Co., 20 F.3d at 293-94; La Preferida, 914 F.2d at 906. As Professors Wright, Miller and Cooper point out, it is very often necessary to consult substantive principles of state law in order to determine the scope of the earlier judgment or the parties who are bound by its terms.8 As we have noted earlier, collateral estoppel is an affirmative defense. Therefore, in seeking summary judgment, Freeman, the defendant in this action, has the burden of establishing each of these elements.

Applying these principles,9 we find ourselves in respectful disagreement with the district court as to the propriety of summary judgment on this record. Havoco's breach of contract claim in the underlying litigation focused upon Sumitomo's alleged breach of the revolving letter of credit provision. Count V of Havoco's Sixth Amended Complaint, the one that governed the trial proceedings, including the jury deliberations, was entitled "Breach of Contract." It stated:

Sumitomo breached said Sales Agency contract because Sumitomo failed to provide an irrevocable, transferable, revolving letter of credit to Havoco, as was provided for in paragraph 6 of the Sales Agency contract.

R.51, Ex. I, p 41. This was Havoco's only allegation of a breach by Sumitomo. Similarly, the jury's special interrogatories focused on the revolving letter of credit provision. One form specifically asked the jury to indicate whether "Havoco suffered any damage ... caused by Sumitomo failing to provide a revolving letter of credit." R.51, Ex. E. The other form asked whether Havoco waived its breach of contract claim against Sumitomo "by acquiescing in Sumitomo's performance of its agreement with Havoco." Id. Although the latter query does not specifically reference the revolving letter of credit provision, an examination of the record makes clear that Sumitomo's waiver argument was addressed solely to that obligation. See Havoco of Am., Ltd. v. Sumitomo Corp. of Am., 971 F.2d 1332, 1337-38 (7th Cir.1992) (discussing the waiver issue on the direct appeal from the underlying litigation).

By contrast, our examination of the record reveals that the claims against Sumitomo that Havoco was unable to present to the jury alleged additional conduct. More precisely, Havoco's proposed conspiracy count alleged that Sumitomo conspired to eliminate Havoco as a major supplier of coal to the Tennessee Valley Authority. Sumitomo's breach of the revolving letter of credit agreement was only one of the overt acts Sumitomo allegedly committed in furtherance of the conspiracy; Havoco's proposed complaint also alleged that Sumitomo acted in furtherance of the conspiracy by misrepresenting Havoco's intentions to the TVA, by misrepresenting, concealing, suppressing, and omitting Havoco's financial status to the TVA, by misrepresenting the TVA's negotiating position to Havoco, by conducting negotiations in bad faith, and by breaching the sales agency contract through an agreement to represent R & F Coal Company as sales agent. See R.51, Ex. B, pp. 6-10. Similarly, Havoco's proposed fraud and deceit count alleged that it agreed to assign its contract with the TVA to another coal company "in reliance upon the fraudulent misrepresentations and omissions made by [Sumitomo] as detailed hereinabove." See R.51, Ex. B, p 35.

We cannot say, on this record, that the conduct at issue in the counts Havoco was barred from presenting to the jury was coterminous with Sumitomo's breach of the revolving letter of credit agreement. Only the revolving letter of credit issue and, consequently, only conduct relevant to it, was "actually litigated" by the parties.10 We cannot accept Freeman's contention that the jury necessarily found implicitly that Sumitomo had failed to act as alleged in Havoco's proposed non-contractual counts when it determined that Sumitomo had not damaged Havoco by its handling of the letter of credit.11 The jury's finding that Sumitomo did not damage Havoco by breaching the revolving letter of credit agreement, therefore, did not foreclose the possibility that Sumitomo injured Havoco in some other fashion.12 Accordingly, on the record before us, we cannot say that Freeman has met its burden of establishing that the underlying litigation on Havoco's breach of contract claim provides a defense of collateral estoppel for Freeman on the allegation that it negligently failed to file Havoco's non-contractual claims against Sumitomo.

For the foregoing reasons, we reverse the judgment of the district court. The case is remanded for further proceedings consistent with this opinion.