Your layer is densifying the straight lines along which annotation is displayed when the map is being projected. Advanced ArcMap configurations are unsupported for basemap layers and map services.
Solution
Using Advanced ArcMap Settings, turn off the annotation display option to densify the annotation shape line used for display. Follow these steps to turn this off:
- Close ArcMap and navigate to <install drive>:\Program Files\ArcGIS\Desktop10.1\Utilities.
- Double-click the application named AdvancedArcMapSettings.
- Under the Symbols/Graphics tab, look for the panel named Label annotation.
- Uncheck the Produce annotation that curves when projected option.
- Click Apply. The error is repaired.
The default ArcMap setting is that this option is unchecked.
More information
Some ArcMap users will make changes for various advanced settings to support custom mapping workflows. To support this, a special program is included with ArcGIS for managing custom ArcMap settings. This program, named AdvancedArcMapSettings.exe, is contained in the ArcGIS Utilities folder found at <install drive>:\Program Files\ArcGIS\Desktop10.1\Utilities.