No, that’s not why they lost. The reason is because they effectively lend it to many people simultaneously, and implement no controls on getting it “returned” (deleted) by the people they lent it to, while even being aware that some of them don’t “return” it.
The technicality that they keep a copy of the book while it’s being lent isn’t really at issue here at all. It’s not because there are two copies, it’s because there are three or more copies, given to two or more parties at the same time. It has become “distribution” in the eyes of copyright law, beyond the lending analogy.
Even if they did what you described they would still lose. There would be no way to implement a control to prevent an additional simultaneous copy. It's not a technical issue, it's simple impossible inherently.
I don't know why companies keep trying this. MP3.com, Aereo, etc. The precedent is clear.
Again, speaking about the wider CDL initiative (one digital copy lent for each physical copy) and not their National Emergency Library, the Internet Archive do implement a DRM on that digital copy, so for the reader to make additional copies of it is not trivial. Regardless, from where do you get a requirement to prevent (with 100% certainty) the reader from making additional copies? When a person borrows a physical book from a library, they could photocopy the entire thing, then return the book they borrowed to the library and still have an additional copy that they made. Does that make library lending illegal? How is that something that can be blamed on the library in the first place?
The question isn’t whether it’s technically possible, the question is whether they even tried, and one of the reasons they lost is not just because they didn’t try at all, they instead looked the other way when they knew the borrowers didn’t “return” the book.
Do you think it would have made a difference if they bought three copies of the book and then shredded two of them? That way they would have the original they scanned, their digital version they copy to lend, and the loaned digital copy.
The entire article is about fair use and how what IA is doing is not fair use. I would like the IA to exist, but I agree with the ruling that their fair use argument is nonsense. It's not a derivative work.
In the case of a physical object needing to temporarily go digital, it needs to be sent digitally and the records kept, and of course the physical copy has to be kept.
In the case of the GPL there's no physical copy and thus there's no need to consider how to move from one form to the other.
To require that a physical object never be used digitally is bad for society.