Earlier quoted context omitted.
What IA is doing is removing the physical copy from circulation, making a digital copy, and lending out the digital copy. I don't see the argument that this is "distribution" any more than regular (obnoxious) ebook lending is.
If the IA is creating their own digital copies of physical books, it could be argued that that the IA is creating and distributing derivative works. I'm not certain, but my impression is that derivative works have little in the way of legal protection.
The courts have gone back and forth on this issue, and I would expect this ruling to be appealed by either side if they had lost.