Another instance of "it is so simple it eluded me."
Designers from the Igarashi Design Interfaces Project, of the Japan Science and Technology Agency, have made a set of ear-bud style headphones that know which ear they are in. A proximity sensor built into each bud detects where the parts of the ear are located. The right ear will show up on one side of the sensor, left ear will be the other side. According to the picture, it looks as though it only senses one ear, where it will not sense the other at all, hence assuming "left." This detection allows the system to deliver the stereo-audio channel accordingly.
The headphones also produce a "weak electrical current" through the user's head. This is used to detect when an ear bud is removed and shared with another person. Without the current signal, the system will immediately play the music/audio in mono. The goal is that when music is shared with another person, the fullest sound is delivered. This way both can hear all parts of the audio.
Extension of the project has its aim set on detecting when the buds are actually in the users ear via skin conduction sensing. That way the sound stream can be started or stopped automatically. The entire project will be showcased at the Intelligent User Interface Conference in Lisbon Portugal, February 14-17. More details as they come in during the show.