Fuel comes from the tank to the 'IN' steel barb of the filter, out the 'OUT' steel barb of the filter, goes to the injection pump, returns from the injection pump to the plastic valve, leaves the plastic valve and returns to the tank.
Yes, it is temperature controlled, its purpose is to circulate "warm" fuel through the filter at startup to help prevent formation of wax crystals in the filter in extremely cold climates. With today's diesel it is much less necessary than it used to be.
It is a complete PAIN in the butt. It actually doesn't do anything useful in terms of purging air out, in fact quite the opposite. It makes it very difficult to get air out of the fuel system until it has warmed up enough to close and direct fuel back to the tank as it circulates any air in the system right back in to the filter. Even worse they typically do not seal all that well to the filter so they are often a source of air getting in to your fuel lines.
You can safely block off the ports on it, but a better alternative is to find a filter from a different year that did not have that feature. I believe about 1985 is perfect if you are looking up the filter in a parts catalog.