WATCH: Attorney General Loretta Lynch news conference
The DOJ is seeking a permanent injunction to block the law.
The federal lawsuit says that "transgender individuals seeking access to covered facilities have suffered and continue to suffer injury, including, without limitation, emotional harm, mental anguish, distress, humiliation, and indignity as a direct and proximate result of compliance with and implementation of HB2."
McCrory has been under pressure since the U.S. Justice Department warned last week that the law passed in March violates civil rights protections against sex discrimination on the job and in education for lesbian, gay, bisexual, and transgender people.
According to the Governor's lawsuit, he seeks "declaratory and injunctive relief" against the United States of America, the United States Department of Justice, Attorney General Loretta Lynch and Principal Deputy Assistant Attorney General Vanita Gupta, "for their radical reinterpretation of Title VII of the Civil Rights Acts of 1964 which would prevent plaintiffs from protecting the bodily privacy rights of state employees while accommodating the needs of transgendered state employees."
WATCH: Governor McCrory speaks about lawsuit
In a statement Monday, McCrory said: "The Obama administration is bypassing Congress by attempting to rewrite the law and set restroom policies for public and private employers across the country, not just North Carolina. This is now a national issue that applies to every state and it needs to be resolved at the federal level."
Our lawsuit seeks to ensure that NC continues to receive federal funding until the courts clarify federal law & resolve this national issue.— Pat McCrory (@PatMcCroryNC) May 9, 2016
Senate Leader Phil Berger (R-Rockingham) and House Speaker Tim Moore (R-Cleveland) have filed their own lawsuit that is similar to McCrory's.
At a news conference Monday afternoon, Lynch accused McCrory and the General Assembly of creating "state-sponsored discrimination" and likened HB2 to laws of the Jim Crow era.
"Let us learn from our history and avoid the mistakes of the past," said Lynch.
She said she will be looking at curtailing federal funding to the North Carolina Department of Public Safety and the UNC school system.
Lynch also spoke directly to North Carolina citizens.
"You have been told this law protects vulnerable populations from harm, but that is just not the case. Instead, what this law does is inflict further indignity on a population that has already suffered far more than their share. This law provides no benefit to society - all it does is harm innocent Americans," said Lynch.
Earlier in the day, the American Civil Liberties Union, ACLU of North Carolina, and Lambda Legal - who are challenging House Bill 2 in federal court - accused McCrory of "doubling down" on discrimination against transgender people.
"The federal government made clear that HB 2's mandate of discrimination against transgender people violates federal civil rights laws but McCrory and other political leaders in the state have decided to risk federal funding to maintain that discrimination," they said in a statement. "Transgender people work for the state of North Carolina, attend school in North Carolina, and are a part of every community across the state. It is unconscionable that the government is placing a target on their backs to advance this discriminatory political agenda. Lawsuits are normally filed to stop discrimination-not to continue it."
Federal officials gave McCrory a Monday deadline to declare he wouldn't enforce the new state or risk funding for the state's university system. In letters, federal civil rights enforcement attorneys focused particularly on provisions requiring transgender people to use public restrooms that correspond to their biological sex.
But McCrory's lawsuit states; "The Department's position is a baseless and blatant overreach."
In the lawsuit, McCrory also said he has directed state agencies to make a reasonable accommodation of a single occupancy restroom and says the state also allows private companies to set their own policies for bathrooms, locker rooms, and shower facilities.
"I'm taking this initiative to ensure that North Carolina continues to receive federal funding until the courts resolve this issue," said Governor McCrory.
CLICK HERE TO READ THE COURT DOCUMENTS (.pdf)
Speaking on Fox News Sunday the day before, McCrory called the federal government's action heavy-handed.
"It's the federal government being a bully. It's making law," McCrory said. "The Justice Department is "trying to define gender identity, and there is no clear identification or definition of gender identity."
WATCH: Gov. Pat McCrory on "Fox News Sunday"
McCrory has called the law a common-sense measure. He said it's designed to protect the privacy of people who use bathrooms and locker rooms and to expect all people inside the facilities to be of the same gender. McCrory said Sunday he was not aware of any North Carolina cases of transgender people using their gender identity to access a restroom and molest someone, a fear frequently cited by the law's supporters as the main reason for its passage.
In her comments, Lynch said her lawsuit "is about a great deal more than just bathrooms. This is about the dignity and respect we accord our fellow citizens and the laws that we, as a people and as a country, have enacted to protect them - indeed, to protect all of us. And it's about the founding ideals that have led this country - haltingly but inexorably - in the direction of fairness, inclusion and equality for all Americans."
While McCrory has agreed that the Justice Department could warn of consequences if North Carolina established separate bathrooms for white and black people, the governor said the agency goes too far in contending that transgender people enjoy similar civil rights protections.
"We can definitely define the race of people. It's very hard to define transgender or gender identity," McCrory said. He added that he had made a request for more time to respond to the Justice Department but that was denied.
The governor has become the public face of the law, which has been the subject of fierce criticism by gay rights groups, corporate executives and entertainers demanding that the law be repealed. North Carolina has already paid a price for the law, with some business scaling back investments in the state and associations cancelling conventions.
The 17-campus UNC system risks losing more than $1.4 billion in federal funds if they don't comply. Another $800 million in federally backed loans for students who attend the public universities also would be at risk if it's found that enforcing the law violates Title IX of the Civil Rights Act, which bars discrimination based on sex. The letter to McCrory said the law also violates Title VII, which bars employment discrimination.
Repealing the law also would satisfy the attorneys, but GOP lawmakers who run the General Assembly had no plans before to do so Monday.
Senate leader Phil Berger said last week that he's frustrated because "we have a federal administration that is so determined to push a radical social agenda that they would threaten" federal funding. "I just think the people should be frustrated and people should be angry."
In her comments at Monday afternoon's news conference, Vanita Gupta - head of the Department of Justice Civil Rights Division said the DOJ is not overreaching or creating new law on the issue.
"Title IX and Title VII prohibit discrimination based on sex. The Department of Justice has for some time now made clear that sex discrimination includes discrimination against transgender people - that is, discrimination based on gender identity. That is consistent not only with the language of the statutes, but also with the legal interpretations adopted by federal courts - including the appellate court with jurisdiction over the state of North Carolina," she said.
UNC President Margaret Spellings has said that while the university system is obligated to follow the law, it did not endorse the law. Spellings said later she hoped legislators would change the law, which could discourage promising faculty and students from coming to system campuses. McCrory said the system's governing board wouldn't get together until Tuesday to discuss the issue.