I'd say a paladin using that power against the pit fiend is, in all likelyhood, not a devil of lower level allied with the pit fiend. In fact, the paladin would probably fail all three criteria.
If the paladin didn't fail those criteria, he would certainly be an interesting sort of paladin. Also, kind of dumb for attacking the pit fiend that can make him go boom.
That said, I hope 4th edition will allow powers to continue to be useful at higher levels. The most annoying thing about 3e magic was that only a few lower level spells counted for anything, which is why the sorcerer had to swap out spells later. Sleep was a good spell between level 1-4, but it sucked afterwards. Eventually all your wizard's 1st level spell slots would be taken up by magic missile, and many of your 2nd level slots too.
I would prefer in 4e that the spells continue to have utility at higher levels. I don't say that you should be able to put all your enemies to sleep with a 1st level spell... but it would be nice to use it to avoid fights with a minion or two.
