Well then no one gets to make any phones until they learn to play nicely together.
Just guessing but I'd think that Nokia or Moto on their own would have enough patents to make it very very difficult for anyone else to make a phone if they wanted to be dicks about it.
As long as there aren't any import bans, everyone would still be making devices. Assuming that the cases get large enough and everyone has declared full-out warfare on everyone else, it would be stuck in court for a long time.
For the most part, they don't. Patents essential to a standard are required to be licensed under FRAND terms in most jurisdictions. This generally shuts down most efforts to use these offensively. This is why we probably haven't seen Apple sue with any of the Nortel patents that they've acquired.
It does not encourage innovation. It encourages patenting. Actual innovation happens when companies want to develop something great. This patent system discourages new players from developing great devices, because they could spend years doing actual innovation only to be sued out of existence by one of the big boys that doesn't like competition and has broad patents to kill it.
The opposite problem is also true, however. If a new company develops something and can't patent it, the large companies with established production capabilities, supplier reputation, brand awareness, etc. can easily steal the design from the little guys and make the device and crowd the smaller, new comers out of the market. This discourages new players from developing great devices, because they could spend years doing actual innovation only to be clobbered out of existence by one of the big boys that wants a slice of the action and has the manufacturing and marketing muscle to kill them.
There are issues with the current system suffering poor implementation, but there's a lot of public misconception about the system as well. Most people just look at a patent for something and assume that it's obvious without really digging into the claims or looking at the implementation details. More often than not, something that appeared simple on the surface, has a lot of complicated implementation details that make it non-obvious, or alternatively, fairly easy for some third party to work around.
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