In that counter argument they are essentially admitting that 99% of their content was distributed without the copyright holder's consent.

In the CDL lawsuit, they have admitted that of the millions of books we have digitized, they themselves have only made about 33,000 available to libraries; only about 1% of what we have done, and only under restrictive and expensive license agreements. This is, they claim, the essence of their copyright rights: the ability to restrict access to information as they see fit, to further their theoretical economic interests, without regard to libraries traditional functions and the greater public good.

Was it fair use in the past to redistribute reprints/format-conversions of works without the copyright holders consent?

I agree that copyright law sucks.. but that's why it needs to change so it actually serves "the greater public good". The judiciary system is not the right place to advocate for that (they don't make the law, just interpret it), so I don't really think there's much hope in them winning this. Sadly.