If you actually look at how the Z-Machine compresses texts, it does the following (from memory, it's been a while):
- There's a list of frequently appearing words (like "the", "and") which are directly encoded by an index.
- It uses "shift" codes like in the teletypes to switch between different modes.
This makes it simple to write a fast decoding routine that can be used for output. More importantly, no extra memory is needed for output.
For the purposes of compressing the text enough that it would fit on a disk together with the code for (the part of) Zork they were going to ship this was sufficient, so I don't even think they'd investigate more complex compression schemes.
More complex compression schemes would have several disadvantages:
The decompressor would have to be written in 6502, as a resident routine, taking up more space in the "resident code" part of the RAM than the rather simple decoding routine outlined above.
The decompressor would have needed extra RAM for tables for something like Huffman decoding
Text was paged in using a virtual memory mechanism, so decoding would have been needed to apply to random parts; which complicates things.
So the answer to "why didn't they use Huffman encoding" isn't necessarily "it wasn't known" but more "it would have been much more complicated than the simpler compression scheme, which was good enough".
Yes, I have read "I specifically want to know when it was first used in compression formats", but to answer that you have to take the circumstances into account, and the premise "Huffman code is so much better, they could have just used it" doesn't apply to this circumstances.
So Huffman encoding would have been used when there was enough CPU power and enough RAM available to have a good trade-off between resources spent and compression gained. If it wasn't used, it doesn't follow that "it wasn't known".