They're in horrible legal ground. What they did was illegal (though not necessarily wrong), but now they're risking dying on this hill, which will cause people to lose a valuable service. They need to surrender the hill before it's too late, if it's not too late already
Should be allowed as many physical copies as the library has, as long as the amount lent out does not exceed the physical number of copies So, both physical and digital could be lent within that number of physical copies
Seems odd that I can share digital items in my Steam Library but Book Libraries can't Publishers of every kind have never liked lending or the secondary market