Willard, 72, was taken into custody at about 8 p.m. after officers caught the actor with his pants down in the Tiki Theatre on Santa Monica Boulevard, according to the Los Angeles Police Department. He was released from jail a short time later.
Willard's spokesman said in a statement, "With all do respect to the individual officer, our belief is that Fred did nothing in any violation of any law. We will be working vigorously to clear his name in this matter."
Theater manager Kazi Jafor said he witnessed the arrest.
"That guy was scared," Jafor said, who added that there are rules posted at the door warning people how to behave.
Police say they often monitor adult theaters to see whether illicit acts are going on in a commercial business.
"All the late-night guys, everybody's going to make jokes about this. I can't make jokes about Fred Willard," said celebrity columnist Jeannie Wolfe. "I feel so sad that he publically humiliated himself."
Willard is widely respected in Hollywood, known for his roles in the films "Best in Show," "Anchorman" and "Waiting for Guffman." He was nominated four times for Emmys for guest roles on "Modern Family" and "Everybody Loves Raymond." He is currently the host of "Trust Us With Your Life." An ABC spokesman said "Trust Us With Your Life" will continue to air as scheduled despite Willard's arrest.Since news of his arrest, Willard has been dropped by PBS from "Market Warriors." He had been the host and narrator.