A library is able to lend out physical books because it bought the books. The publisher got paid when the book was purchased. Plus only one person can borrow a given physical library book at a time.
As noted by several other people here, the IA's model of e-lending only allows one person to borrow the ebook at a time, and that is the model that the lawsuit is trying to shut down. (There was a period of 12 weeks where the lending was unlimited, but that period ended 2½ years ago, and this lawsuit isn't over that period but the program as a whole.) IA also bought the books from the publishers. So the only real difference is that IA digitized the book itself and lent out the digital copy.
The fact that a library can lend out a physical book, but not a scanned copy of a book, with all else being equal (having paid for the books, one person borrowing a copy per paid for book) is a blatant power grab by publishers, who have never liked libraries but couldn't really do anything about them before.