Wow, reading the article this seems like a clear cut case. Did IA really think they could win this? Edit: reading other sources, it seems like the crux of the idea is they would only lend out books where they had the same number of physical copies. I can see the reasoning for that, but it seems hard for fair use to get you there.
I think what IA was doing, making sure they only lend out as many copies as they physically own, was clearly within the spirit of that doctrine. But in the digital era, lending anything over the web necessarily means making a copy of it somewhere along the way, which laws haven't adequately adapted to yet.