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-j