Paterno and William Kenney filed a lawsuit Monday in Philadelphia federal court that seeks more than $1 million.
Both served under Paterno's father, Joe Paterno, before he was fired soon after retired assistant coach Jerry Sandusky was charged with child molestation in late 2011.
The coaches say they've been unfairly linked to the Sandusky scandal, making it difficult to find comparable coaching jobs.
Kenney is now an assistant at Western Michigan. Paterno is a writer and consultant.
A Penn State spokeswoman says it's common for head coaches to pick their own assistants but isn't offering more comment.