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The United States and North Carolina tangled over transgender rights on Monday, with the Justice Department filing a civil rights lawsuit over the state’s so-called bathroom bill and state officials defiantly filing suits against the federal directive to stop the implementation of the controversial legislation.

Also, a major player in North Carolina – the state’s public university system – defied the governor and legislature and told the Justice Department on Monday it intends to act “in compliance with federal law” as it relates to House Bill 2, known as HB2.

The Justice Department seeks declaratory relief and threatens to curtail federal funding to the North Carolina Department of Public Safety and the University of North Carolina.

With hundreds of millions of dollars in funding at stake, UNC System President Margaret Spellings said longstanding policy prohibits university personnel from discriminating on the basis of, among other things, gender identity, sex, or sexual orientation.

Attorney General Loretta Lynch, announcing the U.S. legal action to reporters on Monday, cast the bathroom bill issue as the latest civil rights struggle of the era.

“It was not so very long ago that states, including North Carolina, had other signs above restrooms, water fountains, and on public accommodations, keeping people out based on a distinction without a difference. We’ve moved beyond those dark days,” Lynch said.

The act bans people from using public bathrooms that do not correspond with their biological sex. Since its passage in March, North Carolina has become a national battleground on the issue of transgender rights. It has drawn a flurry of condemnation from civil liberties groups, LGBT advocates and major businesses. It has also won praise from groups like the Family Research Council.

Transgender policies across the country: Where do they stand?

After the law’s passage, musicians Bruce Springsteen, Demi Lovato, Nick Jonas, and the bands Pearl Jam and Boston canceled concerts in the state. Those cancellations have cost one major venue nearly $200,000 in ticket sales.

PayPal and Deutsche Bank have both canceled plans to expand into North Carolina.

The Justice Department said last week that “access to sex-segregated restrooms and other workplace facilities consistent with gender identity is a term, condition or privilege of employment. Denying such access to transgender individuals, whose gender identity is different from their gender assigned at birth, while affording it to similarly situated non-transgender employees, violates Title VII,” a section of the Civil Rights Act prohibiting discrimination against workers on the basis of sex, race, color, national origin, and religion.

The federal government demanded the state “remedy” the act or risk being in violation of federal law.

Instead, North Carolina officials filed a lawsuit calling the Justice Department’s position a “radical reinterpretation of Title VII of the Civil Rights Act.” Top state legislators, Phil Berger and Tim Moore, also filed a complaint against the Justice Department.

But Lynch on Monday said the legislature and governor put the state in “direct opposition to federal laws prohibiting discrimination on the basis of sex and gender identity. More to the point, they created state-sponsored discrimination against transgender individuals who simply seek to engage in the most private of functions in a place of safety and security, a right taken for granted by most of us.”

After the federal government asked the state to certify by the end of the day Monday that it would not comply with or implement the bill’s restriction on bathroom access, Lynch said the state requested an extension and that had been under “active consideration.”

Instead, the governor and the state chose another course: a lawsuit.

“But instead of replying to our offer or providing a certification, this morning, the state of North Carolina and its governor chose to respond by suing the Department of Justice. As a result of their decisions, we are now moving forward,” Lynch said.

The federal suit also says the state is in violation of Title IX, the Education Acts Amendment of 1972 that bans gender discrimination in education, and the Violence Against Women Reauthorization Act that outlaws discrimination on the basis of sex.

“This action is about a great deal more than bathrooms,” Lynch said. “This is about the dignity and the respect that we accord our fellow citizens and the laws that we as a people and as a country have enacted to protect them.”

Lynch said there have been “discriminatory responses to historic moments of progress”: the Jim Crow laws that followed the Emancipation Proclamation, the resistance to Brown V. Board of Education, and the “proliferation of state bans on same-sex unions that were intended to stifle any hope that gay and lesbian Americans might one day be afforded the right to marry.”

“That right, of course, is now recognized as a guarantee embedded in our Constitution. And in the wake of that historic triumph, we have seen bill after bill in state after state taking aim at the LGBT community,” she said.

She told transgender people that the Obama administration “will do everything we can to protect you going forward.”

‘Not a protected class’

McCrory’s communications director Josh Ellis said after Lynch’s remarks that the governor is “appropriately seeking legal certainty to a complex issue impacting employers and students throughout the country” but “in contrast, the attorney general is using divisive rhetoric to advance the Obama administration’s strategy of making laws that bypass the constitutional authority of Congress and our courts.”

The act puts in place a statewide policy that bans individuals from using public bathrooms that do not correspond to their biological sex and stops cities from passing anti-discrimination ordinances to protect gay and transgender identity. That power is reserved for the state under the new law.

North Carolina officials defend the act and said it doesn’t violate federal law. The state also said the United States didn’t give the state enough time to deal with the matter.

McCrory said Monday that he requested an additional two weeks to respond but was told he would be granted one week, and only if he issued a statement concurring with the Justice Department.

The lawsuit filed by the governor and Public Safety Secretary Frank Perry calls the demand that the state “remedy” the legislation by Monday or risk being in violation of federal law “a baseless and blatant overreach” and said it is making a “radical reinterpretation of Title VII of the Civil Rights Act.”

McCrory’s argument also said the state of North Carolina hasn’t been given enough time to respond and that the federal government is overstepping its authority.

In a Monday news conference, McCrory blamed the city of Charlotte for raising the issue of gender identity and public restrooms. The matter was not on the state’s agenda, he said, until the city imposed a mandate that “caused major privacy concerns about males entering female facilities and females entering male facilities.”

Because, he said, this is now a national issue – and could affect every U.S. company with more than 15 employees – McCrory called on Congress to revisit the anti-discrimination provisions under Titles VII and IX.

“Our nation is one nation, especially when it comes to fighting discrimination, which I wholeheartedly support,” McCrory said.

North Carolina homes in on Title VII in its lawsuit, saying precedence is clear: “Transgender status is not a protected class under Title VII,” and it cites a half-dozen cases that it says back its stance. Only Congress can change this, the lawsuit says.

Even if the state felt transgender individuals were afforded federal protection, the Justice Department demands overstep, the state suit says, because the law “allows accommodations based on special circumstances, including but not limited to transgender individuals.”

In a statement announcing the lawsuit, McCrory said the federal government was trying to tell every government agency and company employing more than 15 people “that men should be allowed to use a women’s locker room, restroom or shower facility.”

He said later that the “new, complex and emotional issue” pitted privacy against equality.

The lawsuit emphasizes that no one is facing discrimination because the law applies equally to everyone.

“All state employees are required to use the bathroom and changing facilities assigned to a person of their same biological sex, regardless of gender identity, or transgender status,” it says.

The lawsuit filed by Berger, North Carolina Senate president pro tempore and Moore, state House Speaker, reflected the views of many of the bill’s supporters that people “expect to encounter only other people of the same biological sex” when they are in intimate setting such as public bathrooms.

It says the “ideological extremity – and utter unworkability – of the department’s position on the issues in this case is astonishing.”

CNN’s Devon M. Sayers, Shawn Nottingham, Justin Lear, John Murgatroyd, Ralph Ellis and Aaron Smith contributed to this report.