According to the lawsuit, Dr Jose Angel Santana gave Franco a D grade for poor attendance after the Spiderman actor missed 12 out of his 14 'Directing The Actor II' classes at New York University.
The professor claims he suffered public ridicule from Franco and his department.
Santana taught the Oscar-nominated actor while he was attending a graduate filmmaking course at NYU, which Franco completed in May this year.
The professor alleges the university gave the star preferential treatment because of his celebrity status.
"The school has bent over backwards to create a Franco-friendly environment, that's for sure," he told the New York Post.
"The university has done everything in its power to curry favour with James Franco.
"In my opinion, they've turned the NYU graduate film degree into swag for James Franco's purposes, a possession, something you can buy."Franco's stint hosting the Oscars with Anne Hathaway in February this year was widely panned
Franco, 33, was later hired by the university as a lecturer on how to adapt poetry into short films.
New York University has called Santana's claims "ridiculous".
In a statement, spokesman John Beckman said: "It is regrettable and disappointing to see a faculty member - former or otherwise - discuss any student's grade for the purpose of personal publicity,"
Franco, who was nominated for an Oscar for his role in 127 Hours, has not commented on the lawsuit.
As well as starring in films such as Milk and Rise Of The Planet Of The Apes, Franco has sought to expand his interests with stints as a novelist, installation artist, and director.
He has attended numerous courses at top US colleges, including Yale and Columbia.
Franco has recently been accepted to enrol in a doctoral program in literature and creative writing at the University of Houston which he is due to start in September 2012.