The American Civil Liberties Union filed the lawsuit Wednesday on behalf of the group's two members, Joseph Bruce, or Violent J, and Joseph Utsler, or Shaggy 2 Dope. It also names four fans as plaintiffs.
The FBI report on criminal gangs labeled the Juggalos as a "loosely organized hybrid gang." It said those who identify as Juggalos have committed assaults and vandalism, and a "small number" of them have engaged in more serious crimes.
The lawsuit contends that the gang designation violates free speech and due process rights.
"It is a quintessential civil liberties case challenging government abuse," said Michael Steinberg, the legal director of ACLU Michigan.
At a news conference in Detroit, Bruce, 41, and Utsler, 39, wore their trademark face paint. The Detroit-area pair said Juggalos are like a family, not a gang, and they want their fans purged from the report.
"Our merchandise sales are just about cut in half. ... You don't see the stickers in the back windows anymore because everyone's afraid to wave the flag in their car," Bruce said. "They're afraid they're going to get pulled over and harassed."
He said law enforcers "just fear what they don't understand."
Juggalos have lost custody of children, lost jobs and been denied housing because they're fans, Bruce said.
Saura Sahu, an attorney for the group, called the government's depiction of the Juggalos absurd.
"What would it be like if the Department of Justice decided to brand all Deadheads, not just as criminals but as criminal gang members because some of them used or even sold drugs?" Sahu said, referring to fans of The Grateful Dead. "I think we would all think that's ridiculous."
Scott Gandy, 28, is one of the four fans who are suing. He said he wanted to join the Army, but was told by a sergeant that he couldn't apply without removing or covering Insane Clown Posse tattoos. He said he spent hundreds of dollars for the painful procedure and was rejected by the Army anyway.
Brandon Bradley, 20, said he has been stopped by police and photographed because of his tattoos and attire, including a necklace with a man running with a hatchet, which is an Insane Clown Posse symbol.
"I'm proud to wear my Juggalo tattoos since they represent the love I have toward the Juggalo family ... and the message that everyone deserves to be accepted," Bradley told reporters.
In 2012, lawyers for Insane Clown Posse sued the government to get records to understand how the decision was made to include Juggalos in the gang report. They have received more than 100 pages, but most are newspaper articles about arrests. The FBI has refused to release other documents, citing exemptions in the Freedom of Information Act for sensitive material.