Collateral estoppel (CE), known in modern terminology as issue preclusion, is a common law estoppel doctrine that prevents a person from relitigating an issue. One summary is that, "once a court has decided an issue of fact or law necessary to its judgment, that decision ... preclude[s] relitigation of the issue in a suit on a different cause of action involving a party to the first case". The rationale behind issue preclusion is the prevention of legal harassment and the prevention of overuse or abuse of judicial resources.

Parties may be estopped from litigating determinations on issues made in prior actions. The determination may be an issue of fact or an issue of law. Preclusion requires that the issue decided was decided as part of a valid final judgment. In the United States, valid final judgments of state courts are given preclusive effect in other state and federal courts under the Full Faith and Credit Clause of the U.S. Constitution.

Valid final judgments must be issued by courts with appropriate personal and subject matter jurisdiction. It is notable, however, that an error does not make a decision invalid. Reversible errors must be appealed. The legal defense (CE) applies even if an erroneous judgment, or erroneous use of legal principles, occurred in the first action. An incorrect conclusion of the court in the first suit does not cause defendant to forsake the protection of res judicata (and by extension, of CE). A judgment need not be correct to preclude further litigation; it is sufficient that it be final, and that it have been decided on the merits of the case.

Collateral estoppel does not prevent an appeal of a decision, or a party from asking the judge for re-argument or a revised decision. In federal court, judgments on appeal are given preclusive effect. However, if the decision is vacated, the preclusive effect of the judgment fails.

Collateral estoppel cases raise constitutional due process problems, particularly when it is applied to a party that did not participate in the original suit. Due process mandates that collateral estoppel not be applied to a party that has not litigated the issue in dispute, unless that party is in legal privity to a party that litigated it. In other words, every disputant is entitled to a day in court and cannot ordinarily be bound by the negative result of another disputant's suit, even if that other disputant had exactly the same legal and factual arguments.

Due process concerns also can arise even when a party did have a day in court to dispute an issue. For example, a defendant may have not effectively litigated an issue decided against the defendant in an earlier suit because the damages were too small, so it may be unjust to bar the defendant from relitigating the issue in a trial for much greater damages. As another example, suppose that a defendant did effectively litigate an issue to a favorable conclusion in nine cases, but to an unfavorable result in a tenth case. In this situation, note that the defendant did not have the opportunity to use the nine judgments in its favor as collateral estoppel against subsequent plaintiffs, because that would violate their right to a day in court. As suggested by the U.S. Supreme Court in Parklane Hosiery Co. v. Shore, to allow a subsequent plaintiff to use the tenth, negative judgment as collateral estoppel against the defendant may seem unjust.

Historically, collateral estoppel applied only where there was mutuality of parties, meaning that both the party seeking to employ collateral estoppel and the party against whom collateral estoppel is sought were parties to the prior action.

Most courts in the United States have now abandoned mutuality as a requirement for collateral estoppel in most circumstances. The California Supreme Court case of Bernhard v. Bank of America, authored by justice Roger J. Traynor, began a movement away from the application of mutuality in collateral estoppel. Bernhard claimed that certain assets held by the executor Cook of a decedent's estate were part of that estate, while the executor claimed they had been gifted to him by the decedent. In a previous court action it was decided that the assets were gifts to the executor and not assets in escrow, upon which Bernhard sued the bank that had been holding the assets and that had disbursed them to the executor, alleging again that the assets were property of the estate and should have been handled as estate matter. The bank successfully used CE as defense, arguing that Bernhard had already adjudicated the right to those funds and had lost. The court concluded that it was proper for a new party to take advantage of findings in a previous suit to bar action by a party of that suit. Since Bernhard had a full and fair opportunity to litigate the issue in her first suit, the court did not allow her to retry the same issue by merely switching defendants. The precedent of Bernhard holds that collateral estoppel may be used as defense against any party who has fully and fairly litigated an issue in a previous action.