A direct line of sight system employs paired transmitters and receivers: the transmitter focuses the light toward the receiver. Nothing opaque can lie between the two devices, which means the transmitter and receiver locations must be chosen carefully; they must be free from permanent and transient obstruction. It would not be good, for example, to place the transmitters and receivers where people can walk between them and obstruct the signal.
Reflected line of sight systems, when they were used, were most commonly reflected off the ceiling of open rooms. Most cubicle-style offices have white panel ceilings ideal for reflecting infrared signals. Again, obstructions must be avoided. Diffused systems operate like a light bulb, flooding the room with infrared light. Many ceiling mounted infrared systems worked on this principle. Individual stations would have a directed transmitter/receiver pointed at a node suspended from the ceiling. The ceiling node was essentially a repeater capable of taking a signal from any single station and broadcasting it to all stations in the room, creating a wireless broadcast environment.
Infrared has largely faded from the LAN market. It remains present in the personal area network (PAN) space and as a technology for such things as remote control systems. The move away from infrared was largely due to the limitations it imposes. Line of sight limits scalability and the infrared spectrum limits transmission rates. There has also been a historical dearth of standards governing this frequency space, though this could have been overcome had it not been for the other two limitations.
Infrared definitely had its benefits, however. The line of sight requirement made it a far more secure wireless technology because the signal would not bleed out of closed rooms. The technology was (and is) very low cost. Finally, the FCC does not license that spectrum, so its use is unlicensed.