This is because the popup window does not respond to onTouch or onKey events unless it has a background that != null. Check out some code I wrote to help with this. In the basic case you can to call PopupWindow#setBackgroundDrawable(new BitmapDrawable()) to force it to act the way you expect. You won’t need your own onKey listener. You might also need to call PopupWindow#setOutsideTouchable(true) if you want it to go away when the user clicks outside of the window boundaries.
Extended esoteric answer:
The reason the background cannot be null is because of what happens in PopupWindow#preparePopup. If it detects background != null it creates an instance of PopupViewContainer and calls setBackgroundDrawable on that and puts your content view in it. PopupViewContainer is basically a FrameLayout that listens for touch events and the KeyEvent.KEYCODE_BACK event to dismiss the window. If background == null, it doesn’t do any of that and just uses your content view. You can, as an alternative to depending on PopupWindow to handle that, extend your root ViewGroup to behave the way you want.