Yeah, that's about what I expected would happen.
There's no doubt whatsoever that this is a prima facie infringement -- copies are being made and distributed.
The question was whether there were any exceptions to copyright that this could fall within.
Fair use was always going to fail. Typically courts consider four factors from the fair use statute (17 USC 107) in determining whether a particular use was fair or not. These are 1) The purpose and character of the use, including whether it is for commercial purposes or nonprofit educational purposes; 2) The nature of the work; 3) The amount and substantiality of the portion used; and 4) the effect of the use on the potential market for or value of the work. It's not mathematical, and the factors may not have equal weight. It's very fact dependent. And the same use in different circumstances may change from being fair to unfair or vice versa. In practice, I would say that factor four tends to be key more often than not, but that doesn't mean it should always control.
Anyway, here the issue was going to be factors 1 and 4. Factors 2 and 3 are solidly against the Internet Archive -- the works included all kinds, such as fictional works (protected more than factual ones) and they were copied in full.
Factor 1 includes whether the use is transformative, that is whether the work is being added to or changed meaningfully into something else. This wasn't transformative; the books are still books. Changing their format from hardcopy to electronic doesn't add or change anything. The Court did get it wrong when it said that it was the preparation of a derivative work; it's not that either. It's just straight-up copying, just as if one took a photograph that slavishly reproduced an oil painting.
Things like Google Book Search were transformative in that a searchable book archive is not the same thing as the books in it. But the Archive wasn't making anything like that; they just wanted to lend books basically as usual. (And note that Google Books is careful not to effectively make scanned, copyrighted books readable in full without permission)
Factor 1 also includes the commercial / nonprofit angle. Commercial uses can be fair uses (many parodies are commercial, for example) but fair use is likelier for nonprofits. Here, the Archive was basically just trying to dodge paying licensing fees, and apparently used the free books as a draw to bring in members who might donate, etc. This was in the nature of a commercial use.
Factor 4 was always going to be bad; there is an existing market for ebooks and for ebooks sold or licensed to libraries, and this threatened to totally upend it. Usually good success on this factor comes from uses for which there is no market and not likely to be one (e.g. quoting sources in school papers, or recording videos off of the tv for delayed viewing (The famous Betamax case did not permit people to make their own libraries of permanent recordings), or spaceshifting music from CDs to mp3 players -- at a time when there wasn't much of an mp3 market.
Note also that the only issue is harm -- if a fair use happens to benefit the copyright holder, that's irrelevant.
As for the idea that a scheme (often suggested by online folks) whereby only one copy could be used at a time, making it just like lending of pre-made copies under the first sale doctrine, would help, it was well known from the ReDigi case 10 years ago that that is meaningless. The law prohibits making new copies and distributing unlawfully made copies. The number of copies floating around isn't relevant.
This was all immediately obvious on day one. I have never for the life of me understood why the Internet Archive wanted to take such a stupid risk, and I hope that it doesn't end up killing useful things like the Wayback Machine.