This is Google's response thus far (below). I pushed back HARD because this document (https://support.google.com/drive/answer/2494822) states:
An “External” alert badge is displayed on files:
Owned by someone who isn’t from your organization or school.
Shared with others who aren’t from your organization or school.
These alerts help you identify potentially harmful files or when to be careful sharing confidential information in external files.
The Google doc in question has ZERO external people shared to it.
Why have the admin console setting of "Highlight external files" (Apps>Google Workspace>Settings for Drive and Docs>Sharing settings) enabled for "a possibility that external users" might join the class?
That is absurd. Google response follows:
Hello Dave,
Thank you for your response. My name is Pragyan, I’m working with this case as the original owner is OOO.
I have checked with my internal team and have received an update indicating that this behavior is intended. Since there is a possibility that external users may join your classes, Google Classroom provides access permissions for the documents that are posted in the classroom. This is the reason why the file is showing the message as externally shared, even though there are no external users in the particular class.
When you share a file as an assignment, Google Classroom automatically creates a shared folder. This folder is accessible to both teachers and students in the class. Even if no students are enrolled yet, the file will be shared with you and the automated group for the class. This way, everything is ready for your students as soon as they join.
If you believe this update should be modified or have any insights regarding this concern, please submit a feature request idea so that our product engineering team can review it. They read all feedback received through that channel and consider it when planning future updates.
https://support.google.com/edu/classroom/answer/10011324
I hope the above information is helpful to you. I will keep the case open for the next 3 business days. In case if you have any further queries, please revert back on the case. I will be more than happy to assist you further. If the case closes before you have a chance to reply, you do have 30 days time to reopen the case by replying to this email.
Have a nice day!
Sincerely,
Pragyan | 21:00 - 06:00 IST (UTC+5.5)
Google Workspace Support