Craig Monteilh was allegedly recruited by the FBI in 2006 to infiltrate mosques.
For more than a year, he looked for extremists who might be potential terrorists, focusing on a mosque in Irvine.
It accuses the FBI of violating the 1st Amendment rights of hundreds of Muslims.
"This is wrong and this is unlawful, violating the most sacred tenets of our founding freedoms, the right to freely worship without government's interference," said Ameena Mirza of the Council on American Islamic Relations.
FBI officials are not commenting on the lawsuit, but they say they do not target anyone because of their religion.