diff --git a/CHANGES.txt b/CHANGES.txt
index 91a20950..0658c410 100644
--- a/CHANGES.txt
+++ b/CHANGES.txt
@@ -36,6 +36,9 @@ Changes:
 
 * Allow spaces around the equals sign in an annotated function. (Issue #357)
 
+* Do not check vertical whitespace of non-top level classes / function
+  definitions. (Issue #366)
+
 Bug fixes:
 
 * Don't crash if Checker.build_tokens_line() returns None. (Issue #306)
diff --git a/pep8.py b/pep8.py
index 67b32d16..78479bda 100755
--- a/pep8.py
+++ b/pep8.py
@@ -248,7 +248,7 @@ def blank_lines(logical_line, blank_lines, indent_level, line_number,
 
     E301: class Foo:\n    b = 0\n    def bar():\n        pass
     E302: def a():\n    pass\n\ndef b(n):\n    pass
-    E303: def a():\n    pass\n\n\n\ndef b(n):\n    pass
+    E302: def a():\n    pass\n\n\n\ndef b(n):\n    pass
     E303: def a():\n\n\n\n    pass
     E304: @decorator\n\ndef a():\n    pass
     """
@@ -257,8 +257,6 @@ def blank_lines(logical_line, blank_lines, indent_level, line_number,
     if previous_logical.startswith('@'):
         if blank_lines:
             yield 0, "E304 blank lines found after function decorator"
-    elif blank_lines > 2 or (indent_level and blank_lines == 2):
-        yield 0, "E303 too many blank lines (%d)" % blank_lines
     elif logical_line.startswith(('def ', 'class ', '@')):
         if indent_level:
             if not (blank_before or previous_indent_level < indent_level or
@@ -266,6 +264,8 @@ def blank_lines(logical_line, blank_lines, indent_level, line_number,
                 yield 0, "E301 expected 1 blank line, found 0"
         elif blank_before != 2:
             yield 0, "E302 expected 2 blank lines, found %d" % blank_before
+    elif blank_lines > 2 or (indent_level and blank_lines == 2):
+        yield 0, "E303 too many blank lines (%d)" % blank_lines
 
 
 def extraneous_whitespace(logical_line):
diff --git a/testsuite/E30.py b/testsuite/E30.py
index d2d7bf35..be41a30b 100644
--- a/testsuite/E30.py
+++ b/testsuite/E30.py
@@ -87,4 +87,13 @@ def function():
 """This class docstring comes on line 5.
 It gives error E303: too many blank lines (3)
 """
+#: E302
+def a():
+    pass
+
+
+
+
+def b(n):
+    pass
 #:
diff --git a/testsuite/E30not.py b/testsuite/E30not.py
index 0fd8fb0c..c1df60a2 100644
--- a/testsuite/E30not.py
+++ b/testsuite/E30not.py
@@ -6,6 +6,22 @@ class X:
 def foo():
     pass
 #: Okay
+if True:
+    def a():
+        pass
+
+
+    def b():
+        pass
+#: Okay
+if True:
+    class foo():
+        pass
+
+
+    class bar():
+        pass
+#: Okay
 # -*- coding: utf-8 -*-
 class X:
     pass