A federal appeals court on Monday said a lawsuit against Google Inc's effort to create the world's largest digital books library should not have been allowed to proceed as a class action.

The 2nd U.S. Circuit Court of Appeals in New York said Circuit Judge Denny Chin erred in prematurely certifying a class of potentially hundreds of thousands of authors, saying he should have first determined the merits of Google's "fair use" defense.

Billions of dollars are at stake in the eight-year-old lawsuit. Google has already scanned more than 20 million books, and the Authors Guild, a group representing authors, has said Google should pay $750 for each book copied.

"Putting aside the merits of Google's claim that plaintiffs are not representative of the certified class ��� an argument which, in our view, may carry some force ��� we believe that the resolution of Google's fair use defense in the first instance will necessarily inform and perhaps moot our analysis of many class certification issues," the 2nd Circuit said.

The appeals court sent the case back to the trial court for consideration of fair use issues, and said a decision on whether to certify a class could be determined later.

Michael Boni, a lawyer for the authors, said he plans to litigate the fair use issue.

Seth Waxman, a lawyer for Google, was not immediately available for comment.

Chin sits on the 2nd Circuit, but began handling the case as a trial judge and kept jurisdiction after he was elevated to the 2nd Circuit. Monday's decision was issued by three of his colleagues on the 2nd Circuit.

The case is Authors Guild Inc et al v. Google Inc, 2nd U.S. Circuit Court of Appeals, No. 12-3200.

(Reporting by Jonathan Stempel in New York; Editing by Gerald E. McCormick and Sofina Mirza-Reid)