21. Is the car manufacturer precluded from relitigating the issue of whether it violated federal laws with misleading advertising?

A judgment binds the plaintiff or defendant (or their privies) in subsequent actions on different causes of action between them (or their privies) as to issues actually litigated and essential to the judgment in the first action. This conclusive effect of the first judgment is called issue preclusion (or collateral estoppel). Note that issue preclusion is narrower than claim preclusion. Claim preclusion (or res judicata) focuses on the scope of a cause of action and bars the claimant from asserting a second case. Issue preclusion, in contrast, focuses on the narrower issue that was litigated and determined in the first case, and that is relevant in the second case.

Traditionally, the preclusive effects of claim and issue preclusion applied only if the parties in the second case were the same as, or in privity with, the parties in the first case. This was commonly referred to as the «strict mutuality of parties» requirement, which has been reversed in almost all jurisdictions.

Non-mutual issue preclusion (also known as non-mutual collateral estoppel) is the exercise of issue preclusion by a person who was not a party to the prior litigation. That person might be a defendant (asserting it defensively, thus «defensive non-mutual issue preclusion»), or a plaintiff (asserting it offensively, thus «offensive non-mutual issue preclusion»).

Even though the Erie decision made it clear that there is no general common law, there are still particular instances in which federal common law is applied. In most federal question cases, federal common law, not state common law, applies. When there is no state statute at issue, the federal court is free to follow federal precedent.

C is correct. Federal law (federal common law if there is no applicable statute, such as here) governs the preclusionary effect of the judgment of a federal court that exercised federal question jurisdiction. Therefore, federal law, not State A law, governs here.

Furthermore, federal common law does not incorporate the law of the state where the first federal court was located; incorporation of state preclusionary law is found only where the first federal court was exercising diversity jurisdiction. Because federal common law permits non-mutual offensive collateral estoppel, the car manufacturer will be precluded from relitigating the question of whether it violated the law.

A is incorrect. The question's fact pattern states that federal common law explicitly permits non-mutual offensive issue preclusion. As such, this suggestion that federal law does not permit non-mutual offensive issue preclusion is incorrect.

B is incorrect. As explained above, federal common law will apply here even though State B's laws do not allow non-mutual offensive issue preclusion. Federal questions should be evaluated by federal laws and precedence, not the laws of the forum state.

D is incorrect. The first case in State A federal court was a federal question lawsuit because the driver was asserting a federal claim against the car manufacturer. Federal common law applies to cases that are in federal court because they raise a federal question.