It’s the latter. And even worse, they couldn’t claim ignorance or accident, because they were previously using the former system. They had a system set up which only allowed a certain number of licenses to be in use at any one time. When someone checked out an ebook, it was unavailable to anyone else. This is standard practice for libraries.

Then IA intentionally went out of their way to disable this licensing system, and allowed unlimited downloads. It was the worst of both worlds, because it meant they were violating copyright and they took active steps to remove those copyright protections. They couldn’t go “sorry we didn’t know” and get off with some finger waggling and a “don’t do it again”, because they had gone out of their way to intentionally disable the licensing system. They knew exactly what they were doing. Instead, the courts threw the book at IA, because it was an open-and-shut case of blatant and intentional copyright violation.

I'm pretty sure it's number 2. They originally had a limit on the number of people who could read something at one time (likely to match the number of licenses they held), but during the pandemic, they lifted this limit and let an unlimited number of people read it.