Internet Archive's digital library has been found in breach of copyright. The decision has some important implications
theconversation.com
The legal ruling against the Internet Archive has come down in favour of the rights of authors.
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Even assuming that is a viable application of sovereign immunity, which I am not at all convinced, at a minimum you've described a very strong due process violation. No, libraries cannot just arbitrarily infringe copyrights.
Copyright is federal, not state law. The state or municipal library system would get sued and lose in federal court.
The applicable Supreme Court precedent here is Allen v. Cooper. The State of North Carolina published all pictures of a shipwreck within its custody on its website as "public record" and the photography firm that owned the copyright sued. The Supreme Court ruled that Congress cannot abrogate a state's sovereign immunity under its Article I legislative powers and thus ruled in favour of the state.
That case is still being litigated:
https://ipwatchdog.com/2023/02/23/allen-v-cooper-back-queen-annes-vengeance/id=156986/