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It could be taken off the Android market, but Google doesn't forbid alternative installation modes. It's not foolproof, but at least with Android you own the software and can install it without having to go through a corporate monolith like Google/Apple.

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IANAL, but would they still be allowed to distribute their app themselves?

From a country with no software patents? IANAL either but I don't see how this could be stopped, especially in case of an app whose development had been funded via donations and which is distributed free of charge.

Say, they do distribute it this way and are found guilty of patent infringement. Would they then need to pay for each copy downloaded? I have no idea how this works, it would be really helpful if somebody with some knowledge could chime in.

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