All of these early casinos existed in the shadow of state law. In 1987 the United States Supreme Court, in two separate rulings, made clear that Indian Nations had broad rights to engage in gaming activities on reservation land. In the first ruling, regarding a dispute between the Seminole tribe and the state of Florida, the court held that the Seminole could engage in "high stakes" bingo games with jackpots of up to $10,000 despite Florida state law making any bingo game paying more than $100 to the winner illegal. In a second, more sweeping ruling, the court held that the tiny Cabazon Tribe in California was entitled to operate on reservation land any and all gaming activities that the state of California authorized in any form. This ruling was significant in that California and most other states allowed charitable organizations to hold "Las Vegas" nights in which casino style gambling was allowed. Although state laws controlled this charitable gambling with a variety of regulations, because of the mere existence of such activities within the law the court held that tribal governments could sponsor similar events in casinos on reservation land, but without state control.

These two Supreme Court rulings caused considerable legal turmoil and in 1988 Congress acted to create a structure to rationalize the relationship between state gaming regulations and Indian gaming activities. The Indian Gaming Regulatory Act (IGRA) rationalized the relationship between state authorities and Indian casinos by defining classes of gambling and requiring in certain situations that mutually agreed upon "compacts" be signed between state and tribal governments.

IGRA defined three classes of gambling. Regulation of "social" games conducted for prizes of minimum value as well as bingo and card games where players play against each other rather than against "the house" were largely left to Indian tribes. In some cases these games were also regulated by a federal agency. In contrast, "class III" gaming, which was largely made up of casino gambling, was to be regulated through a "compact" agreed to between the relevant Indian tribal government and the state government in which the gaming occurred. States could regulate Indian casino gaming only insofar as tribes voluntarily agreed to through a compact, but tribes could legally operate casinos on reservation land only after a compact had been signed.