The maker of Chubby Hubby ice cream sued Unilever this month to block the sale of the Israeli business to the licensee, Avi Zinger, saying Unilever had guaranteed Ben & Jerry's the right to protect its brand when buying the company in 2000.
The Burlington, Vermont-based Ben & Jerry's said last year it was ending sales in Israeli-occupied Palestinian territories because it was "inconsistent" with its values, a move that ultimately led to the sale to Zinger.
Ben & Jerry's and Unilever agreed in mid-July to try to reach a deal out-of-court by July 28.
The talks did not work out because Ben & Jerry's does not want to "cave" on its social mission and stance on Palestinian human rights, a source said.
The spat between Ben & Jerry's and Unilever has tested the limits of how far the global consumer products and food maker will go in allowing its brands to have social missions. Giving brands a "purpose" and mission to "do good" has been a key part of Unilever's overall strategy.
Unilever's chief executive Alan Jope said this week on the company's quarterly earnings call that Ben & Jerry's "long-term future" is "squarely as part of Unilever."
"There is plenty for Ben & Jerry's to get their teeth into in their social justice mission without straying into geopolitics," he said.
Jope's statements were made during the mediation, said the source, who could not be identified because he was not authorized to talk to media.
Spokespeople for Ben & Jerry's and Unilever could not immediately be reached for comment. The source added that the ice cream maker and Unilever could still try to settle out of court.
Unilever has said previously that Ben & Jerry's had the right to make decisions about its social mission. The move was condemned by Israel and led to some investors selling their stocks or bonds in the company.
The sale of the business to local licensee Avi Zinger will make the ice cream products available throughout Israel and the occupied West Bank.
(Reporting by Jessica DiNapoli in New York; Editing by Sam Holmes)
By Jessica DiNapoli