It turns out that this is a gnome 3 configuration problem.
[quote from http://who-t.blogspot.com/2011/04/gnome-30-middle-mouse-button-emulation.html ]
GNOME 3.0 has a gsettings key to also trigger this behaviour on a per-user basis (see bug 633863). The default value is off (false). Settings applied from the desktop environment overwrite xorg.conf(.d) settings, so to get middle button emulation in GNOME simply toggle the gsettings key and don't worry about xorg.conf(.d). The command to toggle the key is:
$> gsettings set org.gnome.settings-daemon.peripherals.mouse \