The more I look into this I believe it may be a mixture of kernel driver and 
xorg interaction.
See bug #582809 which I believe may be related.

With an external input device attached, rmmod'ing psmouse completely
disables the touchpad (as expected), but enables all of the correct
click functionality of the USB mouse.

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https://bugs.launchpad.net/bugs/730823

Title:
  Input device button/click not working on fresh Natty Alpha 3 install

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