IANAL, but that specifically deals with denial of boarding, which isn't technically applicable to the incident in question. Moreover, it only applies in context of oversold flights, and the flight was not oversold.

Assuming it does apply, there's no outright prohibition on denial of boarding to confirmed reserved space passengers. It merely says that the airline must ensure that the smallest practicable number of confirmed reserve space passengers are involuntarily denied boarding.

The deadheading crew was likely using positive-space employee passes that had a higher seating priority than any ticketed passengers on the flight. According to the definition of "confirmed reserved space"[0], those employees may very well qualify as such. I could find no specific statement suggesting that employees are not considered passengers for the purposes of the definition, let alone deadheading employees that are not involved in the operation of that particular flight.

There's even a section on boarding priority that's pretty vague and largely boils down to having a reasonable policy in place to deal with situations where insufficient volunteers come forward to take advantage of compensation.[1]

[0] https://www.law.cornell.edu/definitions/index.php?width=840&...

[1] https://www.law.cornell.edu/cfr/text/14/250.3