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In the IRM policy settings in a document library in SharePoint Online there is an option to "Allow Group Protection".

From what I know of the IRM settings they apply to all document within a document library where the settings are turned on.

But with this "Allow Group Protection" it seems to mean that you can target a specific AD group only with the IRM settings but I cannot find any clear documentation on what it actually does but I did find the link below which is also not clear as it seems to say that by adding a group in there you can share with that group.

In my scenario I have an external group which we want to keep restricted but do not want to apply the IRM settings to our internal users who use the documents in that document library.

https://support.office.com/en-us/article/apply-information-rights-management-to-a-list-or-library-3bdb5c4e-94fc-4741-b02f-4e7cc3c54aa1

Can somebody bring some clarity to this setting?

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The “allow Group Protection” allow members of an AD group to share the document with each other.

To restricted external users but internal users to use the documents in the document library, I recommend you to disable external sharing in Office 365 and SharePoint site.

More information check the article: External Users with SharePoint Online in Office 365

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