Okay, a bypass switch works at L1, and when an inline appliance like an IPS or firewall is connected to the bypass switch, the bypass switch simply grabs all traffic coming in an either side and redirects it through the inline appliance. There is no encap / decap of packets passing through the bypass switch, since it's L1 and does not recognize those high level headers.
However, what happens when the inline appliance fails and the bypass switch engages Bypass Mode? Do the packets passing through it have their destination IP or MAC changed to reflect the bypassing of the inline appliance? Or could it be that no changes to the destination MAC and IP takes place because the IPS and firewall ACT as L1 devices even though they actively analyze and process the higher level headers?