AFAIK, they didn't sue, but were part of a consortium of tax preparers who sucessfully lobbied Congress to limit the IRS's ability to make filing easier.
The IRS had wanted people to file electronically for years. The original plan was for the IRS to produce software and just give it away for free and have everyone, and I do mean "everyone" file for free.
But when they set up their original e-file program, it was limited as to WHO could access it, meaning it was limited to tax professionals, who charged a pretty penny for the service. Eventually the IRS had just enough clout to get free e-filing for lower income taxpayers, in exchange for essentially handing them off to Intuit/HRBlock/etc for an upsell of services they don't really need.
However, the states aren't limited in that way, and some states were able to implement their own systems independently without Intuit/HRblock/etc interference. This is why, for example, no tax filing company offers free-filing of state returns in Illinois, it's essentially revenge for Illinois having it's own system...which works very well.