According to legal papers, Sarah Tither-Kaplan and Toni Gael claim the "127 Hours" star pressured students to strip off for auditions at the Studio 4 school, which he co-founded.
The accusers also claim Franco and other teachers and instructors engaged in "inappropriate and sexually charged behaviour" towards female students, and created "an environment of harassment and sexual exploitation."
However, Franco's attorney Michael Plonsker hit back at the claims in a statement to The Hollywood Reporter, saying: "This is not the first time that these claims have been made and they have already been debunked."
"We have not had an opportunity to review the ill-informed Complaint in depth since it was leaked to the press before it was filed and our client has yet to even be served. James will not only fully defend himself, but will also seek damages from the plaintiffs and their attorneys for filing this scurrilous publicity seeking lawsuit."
In the lawsuit, the student claim Franco offered up roles in independent films he was producing or directing for daring to bare all and appear in sex scenes. They allege female students were "pressured to engage in simulated sex acts that went far beyond the standards in the industry."
Gael claims she was denied entry into a sex scenes masterclass after voicing concerns, and her fellow plaintiff, who landed roles in Franco productions, alleges the star removed actresses' genital guards while he "simulated oral sex on them" during an orgy scene.
Franco was previously accused of inappropriate behaviour and abuse of power by five women. He has called the allegations "inaccurate."