I am having the same issue.
I'm using Digital Editions 220.127.116.11394 & Sony PRS-600. The Sony has been authorized.
When connect the Sony and then download the library book, I have the same problem described above.
When I download before connecting the Sony, it downloads and I can read it in Digital Editions.
Then I connect the Sony and attempt to copy the book to the Sony. Get the following message:
Errors Were Detected
The following items could not be copied to your device.
xxxxxx CE_COPY_NOT_ALLOWED - No permission to copy the book
I just updated to Digital Editions 4.0.3 and the problem persists.
Problem SOLVED. Overdrive has an article that explains how to transfer borrowed books to a Sony reader. Even though the title mentions "wifi" the ereader does NOT need to be Wi-fi (my PRS-600 isn't). See OverDrive | How to borrow and download eBooks using ...