US District Court judge Denny Chin has decided that the amended agreement between the Authors Guild and the Association of American Publishers would "go too far" and give Google an uncompetitive advantage.
"The [amended settlement agreement] would give Google a significant advantage over competitors, rewarding it for engaging in wholesale copying of copyrighted works without permission, while releasing claims well beyond those presented in the case," Chin said.
"The motion for final approval of the (proposed settlement) is denied, without prejudice to renewal in the event the parties negotiate a revised settlement agreement."
Google has already scanned millions of books which are available online. It responded by saying the ruling was "disappointing", but that it will "consider our options".
"Like many others, we believe this agreement has the potential to open up access to millions of books that are currently hard to find in the US today," Google's managing counsel, Hilary Ware said in a statement.
The settlement arose in 2008 after publishing groups opted to work with Google instead of pursuing legal action. The deal would see Google pay millions in royalties every year for making available digitised books without attributable authorship, and set up a register so authors could be able to identify works of their own and be paid for them.
At the time, internet and software giants like Microsoft, Yahoo and Amazon opposed the settlement, along with the US Department of Justice. Those tech companies formed a group called the Open Book Alliance, which released a statement overnight saying the ruling was a "victory for the public interest".
Chin pointed out that while a new agency would be developed to help orphan works to be identified, Google would still be selling digital copies of those books.
"And it would do so even though Google engaged in wholesale, blatant copying, without first obtaining copyright permissions," Chin said.
However, there is some hope for the settlement. Chin wrote that many of the concerns raised in his ruling could be alleviated if the deal would allow users to "opt-in", rather than "opt-out".
"It is incongruous with the purpose of the copyright laws to place the onus on copyright owners to come forward to protect their rights when Google copied their works without first seeking their permission," Chin said.
"There are likely to be many authors – including those whose works will not be scanned by Google until some years in the future – who will simply not know to come forward."
Google said in a statement, "we'll continue to work to make more of the world's books discoverable online through Google Books and Google eBooks".
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