A system and method for watermarking data that includes a client device, a file system manager, a file server, and a storage network. The file system manager sets watermark control information. The file server includes: (1) a file writing process including a file watermark examination procedure and an action procedure, the action procedure determining an action based on a result of the file watermark examination; and (2) a file reading process including a watermark definition procedure, a file handle/memory preparation procedure, a file data copy procedure, and a watermark insertion procedure. During a read request the watermark definition procedure determines whether a file to be read is to be watermarked based on a user at the client device that requested to read the file. Whether a write request is processed or not is based on the user and whether the file to be written contains a watermark.