Lying there naked, that fall day in 1969, floating in the tranquil, Sandstone Ranch body-temperature swimming pool along with 19 other participants in one of Paul Bindrim's nude encounter weekends, Gwen Davis hardly imagined that nine justices of the Supreme Court would be pondering her fate -- indeed, in the words of novelist Kurt Vonnegut, the fate of "all commerce in ideas" -- 10 years later.

When she climbed into the Buick Riviera in front of her Beverly Hills home that morning, she had been thinking about "re-doing 'Madame Bovary' for Southern California -- a novel about too much leisure and a lot of bored women." Her last novel, "The Pretenders," had sold 3 million copies. And now she was searching for a link between the drifting days of the '60s and the aimless, middle-class monotony that characterized the France of Bovary.

Before you start to write," a friend has suggested, "do this nude encounter."

And being a Southern Californian -- a woman who spent two weeks a year on retreat talking to no one; a woman who occasionally fasted, who practiced yoga, who herself was looking for The Answer at age 35, Gwen Davis agreed "to shed the clothes that hide us from our deepest fears," as the 59-year-old Bindrim characterizes his weekend sessions.

Two years later, in 1971, Dobleday published Gwen Davis' "Touching," a novel about a woman named Soralee "who wanted to see everything for herself, except dying." In the course of exploring her potential, Soralee attends a nude encounter run by a Dr. Simon Herford.

One month after the publication of "Touching," Paul Bindrim sued Gwen Davis and Doubleday, claiming that the book defamed and injured his professional status because its male character was "a libelously distorted portrait of me."

"I was known all over the world as the man who started nude psychotherapy," says Bindrim, who still conducts the encounter sessions. "If you write about an elephant who flies by his ears, you can call him Herman but everyone knows he's Dumbo."

Welcome to the home of hot tubs and Werner Erhard, the land of Bakke, the nation where criminals remind cops to read them their Miranda. An eminently disposable novel that didn't sell out its first printing collided with a therapist whose Ph. D. came from an unaccredited university, and precipitated a literary crisis in which the potential as a precedent far exceeds its anticedents.

Two separate juries in California ruled in favor of Bindrim, one awarding him $75,000 in damages. Last month Davis and Doubleday petitioned the Supreme Court to review this "unprecedented" ruling, that fiction can be libelous, which writer's organizations around the country, in an amicus brief prepared for the Court, have called "a loose cannon on the deck of creativity."

Most authors and editors seem to agree.

"If this decision stands," says "Godfather" author Mario Puzo, "how is a novelist going to do anything? I don't know how you'll be able to write a novel anymore. According to this ruling, Frank Sinatra could have sued me; anybody could sue anybody."

"Underlying all this business is a secret feeling that art should be innocuous," says New Yorker fiction editor Roger Angell. "It's extremely inhibiting to the whole fictional process. One of the purposes of fiction is to create people who we know every day."

Davis claims that Bindrim's suit has already affected her creativity.

I was working on one chapter of 'Ladies In Waiting' [her just-published novel set in Washington] right after we had gone to court. I felt paralyzed, nervous about every adjective. I had written about women working in museums and I went back and changed all of it. I thought, 'What if somebody claims I overheard one of their conversations and used it?' I felt this self-imposed censorship, and God knows it's hard enough to be creative without someone riding shotgun on your adjectives."

"It's terribly complicated sorting out the inspriation of reality and what the novelist does with it," says novelist Philip Roth. "I think serious writers will continue doing what they've always done; the difference will be the anxiety of publishers."

Says Anthony Schulte, executive vice president and publisher of Random House:

"If this decision stands, it's going to make publishers extremely cautious about fiction based on contemporary themes and subjects."

"This is the first time a court has held fiction to such a strict standard," says Robert Callagy, attorney for Doubleday, which was assessed $25,000 in punitive damages by one of the California courts for failing to investigate the possible sources of Davis' character.

"In effect the court is saying that to the extent you write about characters modeled after living people, you're not writing fiction, and that one letter of complaint to a publisher can stop the presses."

"Utter nonesense," says George Slaff, Bindrim's attorney. "You can write about living people in fiction all you want, but creativity doesn't give you the license to libel. Take Fitzgerald, 'Tender Is The Night.' Dick and Nicole Diver are based on real people [Sara and Gerald Murphy], but they're not libeled."

Novelist Kurt Vonnegut describes the situation as "litigation mania. Publishers will dread lawsuits. If this thing stands, it's going to be very damaging and hamper storytelling in this country severely. Something like this could bring all commerce in ideas to a halt."

Davis and her supporters argue in their petitions that the California courts were incorrect in finding her portrayal of the encounter group leader libelous, incorrect because descriptions of vulgarity and simplistic behavior attributed to him were fictionalized.

"Bindrim said that the name Herford made him sound like a cow," says Davis. "He claims that the man in the book was depicted as an egotist. I feel damned-if-I-do-and-damned-if-I-don't. In effect the court is saying you can only create a character with a grounding in reality if the identification is changed in a flattering way."

Davis also petitions the Supreme Court to question the lower court ruling that "a widely disseminated book that may be read by thousands, if not millions, may be found defamatory if a single person (other than plaintiff) is able to guess the identity of the person or persons who inpsired a fictional character."

Ironically, "Touching" was not read by million. Its initial printing of 35,000 hardback copies did not sell out. "It didn't do well in paperback either," says Davis. "It certainly never made back its advance -- $150,000." e

The matter is now in the hands of the Supreme Court justices, who are wading through documents filled with as many literary as legal references, juxtaposing Proust's "Remembrance of Things Past" with New York Times v. Sullivan. They are expected to announce Monday whether they will review the California ruling or let it stand.

"No judicial decision has ever cut closer to the heart of the creative process," Davis claims in her petition. "The great literature of our civilization has been contemporary fiction. If this decision is allowed to stand, it will chill literature and the dramatic arts throughout the U.S. and perhaps the world. Contemporary fiction might disappear leaving us with historical novels and science fiction."

In their amicus brief to the Court, several professional writers' organizations argue on Davis' behalf that Bindrim's victory "is deadly to creativity. Fiction which lives and talks to us in conviction and feeling does so precisely because it is grounded in reality. The imaginative touch and the insightful, fictionalized detail give it life. But the court penalizes the writer for part of what [she] adds to [her] observations while ignoring the overwhelming parts which make the work a fiction and not a libel."

In accepting his Nobel prize for literature in 1976, Saul Bellow said, "A novel is balanced between a few true impressions and the multitude of false ones that make up what we call life. It tells us that for every human being there is a diversity of existance; that the single existence is in itself an illusion in part; that these many existences signify something, tend to something, fulfill something: It promises us meaning, harmony, and even justice."